Guide prepared for the assistance of those interested in doing in . PwC Mexico January 2015

Doing Business in Mexico

www.pwc.com/mx/doing-business

This Guide has been prepared for the Foreword assistance of those interested in doing business in Mexico. It is not intended to cover exhaustively the subjects it highlights, but rather to answer some of the important, broad questions that may arise. When specific questions occur in practice, it will often be necessary to refer to the laws, regulations and decisions of the country and obtain appropriate business, accounting and legal advice. The material contained in this Guide was assembled in January 2015 and, unless otherwise indicated, is based on information available at that time.

Introduction PwC in Mexico

We trust that this latest printed edition of our Doing Business in Mexico will be a useful tool to assist the business executive when seeking information from a general reference guide. The Guide has been structured in a way that we believe will make it easier for you to obtain the basic relevant information you require when considering a direct or indirect investment in Mexico. Mexico is currently one of the countries with the largest network of tax and information exchange treaties and trade agreements, which brings it into the list of the largest and most open economies in the world, with only a handful of strategic sectors or industries not yet open to private investment. Mexico has kept its fiscal and monetary policies under strict discipline, a situation that has maintained the country with an adequate macro-economic position and suitable for an investment from that perspective, as well as maintaining an “investment grade” from the international financial community. For 2014, Mexico is forecasting an economic growth rate between 2% and 3%. Nevertheless, the very significant cross-border commercial and investment interaction with the rest of the economies in the current globalized environment may also allow significant opportunities to invest or trade with Mexico. This optimistic view is further enhanced by the current commitment of the Mexican Executive and Legislative branches to reform and modernize all aspects of the economy and government, to promote employment and economic development. Consistent with its fiscal and economic policies, Mexico has opened its doors to foreign investment, providing incentives for the creation of jobs and most of the 32 states offer local investment incentives in their jurisdictions. PwC has presence in the most important cities of Mexico, covering the country’s entire geography. Our professionals from the 21 offices listed in this Guide will be happy to assist or refer you to the appropriate specialist who can help you navigate the challenges of doing business in Mexico, in the context of a best practices approach, using a single point of contact and service delivery, offered consistently through our wide range of services and specialist areas, as you have come to expect from the PwC Network throughout the world. All of us in the Firm are very excited and committed to bringing you the PwC experience and values, as further discussed in the chapter entitled “Introduction to PwC”. So, rest assured that in this Guide we have done our utmost to bring to you a truly valuable tool to plan your investment into Mexico. Sincerely,

Carlos Mendez Territory Senior Partner

Table of Contents Investment Climate

Chapter 1 Mexico – A profile Investor considerations 1 Geography and climate 2 History 2 Political system 3 Legal system 3 Population and social patterns 3 The Economy 5 Hints for the business visitor 13 Chapter 2 Business environment Investor considerations 15 Industrial climate 15 Framework of industry 15 Focus of government policy 16 Public/private sector cooperation 17 Labor/management relations 17 Overseas trade relations 18 Chapter 3 Foreign investment and trade opportunities Investor considerations 19 Investment climate 20 Special investment opportunities 21 Chapter 4 Investment incentives Investor considerations 23 Investment policy 23 Tax concessions 23 Regional incentives 24 Industry incentives 24 In-bond processing industry ( industry) 26 Industrial parks 26 agreement 27 International financial center operations 27 Export incentives 27 Ministry of the Economy (SE) export programs are as follows 27 Incentives to invest in other countries 30 Incentives and foreign investment strategy 30 Chapter 5 Restrictions on foreign investment and investors Investor considerations 31 Regulatory climate 32 Liberalization of foreign investment restrictions 33 Exchange controls 33 Restrictions on foreign investment 34 Policy trends 39 Chapter 6 Regulatory environment Investor considerations 41 Regulation of business 42 Competition Policy 42 Price controls 42 Mergers and acquisitions 43 Securities markets ( exchange) 43 Requirements for Securities Commission approval 43 Mexican 43 Brokers and broker-dealers 44 Imports and exports 44 Consumer protection 44 Data Protection 44 Imports 46 Food and drugs 46 Environmental provisions 46 Electronic Contracting: Private use and public trend; online consumer protection 47 Special industries 47 Insurance and banking 47 Patents and trademarks 49 Patents 49 Trademarks 49 Copyright protection against video and audio piracy 49 Chapter 7 Banking and finance Investor’s considerations 51 General note 52 Banking system 52 Specialized financial institutions 54 Non-Bank financial entities 54 Investment institutions 55 Retirement fund managers (AFOREs) 55 Financial markets 56 International financial market 57 Sources of funds 57 Impact of the Foreign Investment Law and NAFTA on the financial services industry 59 FATCA’s (Foreign Account Tax Compliance Act) Implications for Mexico and Mexican Financial System 59 Chapter 8 Exporting to Mexico Tips for exporters 61 Import restrictions 62 Import duties 62 Other taxes 63 Documentation procedures and technical barriers to trade 64 Customs and storage 64 Port of entry and inland transport 65 Re-exports 65 Local representation 66 Sources of information 67 Chapter 9 Business entities Guide to “doing business” entities 69 Forms of business enterprise 70 Stock Corporation with variable capital 77 Other considerations 77 Partnership 79 Civil partnership 79 Joint venture contract 79 Branch of a foreign corporation 80 Sole proprietorship 81 Non-profit organizations 81 Chapter 10 Labor relations and social security Investor considerations 83 Labor relations 84 Working conditions 86 Social security 91 Housing 93 Chapter 11 Audit requirements and practices Investor considerations 95 Statutory requirements 95 Chapter 12 Accounting principles and practices Investor considerations 101 Form and content of financial statements 102 Revelant aspects in Financial Reporting 104 Footnote disclosure 108 Recording of income 108 Book and tax differences 108 Foreign investors 108 Chapter 13 Tax system Investor considerations 111 Principal taxes 111 Legislative framework 112 Income tax 113 Classes of taxpayer 114 Taxable income 115 Tax year 115 Tax-free zones 115 Tax holidays 115 Capital taxation 116 International aspects 116 Chapter 14 Tax administration Investor tax considerations 117 Principal taxes 117 Administration of the tax system 118 Corporate taxpayers 118 Individual taxpayers 122 Partnerships and joint ventures 125 Chapter 15 Taxation of corporations Investor considerations 127 Corporate tax system 128 Taxable entities 128 Gross income 129 Business profits 130 Capital gains 132 Deductions 137 Tax computation 147 Other taxes 149 Branch versus subsidiary 150 Special industries 150 Chapter 16 Taxation of foreign corporations Investor considerations 153 Tax concepts 154 Imports 154 Branch operations 155 Income from subsidiaries 158 Fees paid to foreign corporations 163 Portfolio investments 163 Taxes other than income tax 163 Regional administrative offices 163 Chapter 17 Taxation of shareholders Investor considerations 165 Domestic shareholders 166 Foreign shareholders 167 Reorganizations 167 Chapter 18 Taxation of foreign operations Investor considerations 171 Taxation of foreign income 172 Double taxation relief 173 Chapter 19 Partnerships and joint ventures Investor considerations 175 Partnerships 175 Joint ventures 176 Chapter 20 Taxation of individuals Tax planning for expatriates 177 Territoriality and residence 178 Gains on the sale of shares through stock exchange 182 Deductions 186 Double taxation relief 187 Tax computation 187 Other taxes 188 Chapter 21 Taxation of trusts and estates Investor considerations 189 Trusts 190 Estate and gift taxes 192 Chapter 22 Value-Added Tax (VAT) Investor considerations 193 Scope of Value-Added Tax 194 Taxable transactions 194 Sales of goods 195 Services 195 Rental of goods 195 Imports 195 Exports 196 Rate of tax 196 Payments of tax 196 Taxpayers subject to VAT withholding 197 VAT Refunds and overpayment certification process 197 Chapter 23 Other indirect taxes Investor considerations 199 Tax on acquisition of real estate 199 Federal excise and vehicle taxes 199 State and municipal taxes 200 Chapter 24 Tax treaties Investor considerations 201 Tax treaty policy 201 Treaty models 201 Treaty provisions 201 Exchange of information 201 Appendix I Corporate tax rates 203 Corporate tax rates 203 Appendix II Tax depreciation rates 204 Appendix III Corporate income tax and employee profit sharing calculations 205 Appendix IV Withholding taxes – Taxation of shareholders 206 Appendix V Withholding taxes – Payments to non-residents 208 Payments to residents of treaty countries 211 Appendix VI Tax treaties 216 Tax treaties in force 216 Treaties under negotiation or not in force yet 216 Appendix VII Individual tax rates 217 Sample computation of annual tax 217 Computation 217 Appendix VIII Monthly individual withholding tax rates 218 Calendar year 2014 218 Sample computation of monthly net withholding tax 219 Computation 219 Appendix IX Personal allowances 220 Expenses 220 Credits 221 Foreign Tax Credit 221 Appendix X Individual income tax calculation 222 Calendar year 2014 222 Tax computation 223 Appendix XI Social security contributions and benefits 224 Contributions 224 Wage ceiling 224 Appendix XII Value-added tax – Items subject to zero rate 225 Appendix XIII Financial Statements 227 Appendix XIV 230 Acquiring a business enterprise – A checklist 230 Investor’s considerations 230 II Legal counsel’s considerations 232 III Accountant’s considerations 233 Appendix XV Checklist – Structuring an investment 234 Appendix XVI Major events/changes 237 Business information services 238 PwC Mexico Tax and Legal Experts 242 Our network 244

Chapter 1 1 Mexico – A profile

Investor considerations • Stable government. • President elected every six years for a single term. • Foreign investment rules in Mexico are liberal. • Strong government efforts to keep inflation low. • Continuing trend toward reprivatizing government-owned enterprises. The electricity sector opened up to private investment to facilitate the urgent need to expand Mexico’s generating capacity. Further relaxation occurred in 2014 under current energy reform including: oil and gas activities and power generation and distribution, as well as for the telecommunications reform that liberalizes the sector. • Trade barriers are substantially reduced and free trade has been in place with 45 countries including Mexico’s major trade and investment partner countries. • In-bond processing companies () with high productivity and quality are available. • Long common border with the United States provides a large market for exports. • Leading foreign banks have subsidiaries or joint ventures in Mexico as result of open foreign investment rules in all segments of the financial sector. • Population is approximately 112,000,000 inhabitants (source: Inegi), increasing at a rate of about 1.4% per year. • Moderate cost, easily trainable workforce. • Climate is generally mild. • Tourist attractions include archaeological sites, colonial cities, typical towns and extensive coastlines, with excellent beach resorts.

Doing Business in Mexico 2015 1 Geography and climate Mexico (officially the United Mexican States) has an area of 760,000 square miles (1,970,000 square km), the twelfth country in the world in size, and occupies the southern part of North America. It is the third-largest country in after and Argentina. Almost 40% of Mexico, including the entire northern part of the country, is arid or semiarid. Annual rainfall increases toward the south where there are zones with the highest levels of rainfall in the world; the rainy season usually runs from May to October, with very little rainfall during the rest of the year, except in the coastal area near the Gulf of Mexico. Nevertheless, the climate varies widely, in part because of the wide variation in altitudes in the country and the effect of the Pacific Ocean and the Gulf of Mexico on the coastal areas. and many other regions in the central part of the country have a semitropical climate. There are very few regions, aside from the higher mountains, where it snows regularly in winter. Most of the coastal regions have a humid, tropical climate. Mexico’s geographical features range from swamp to desert and from tropical lowland jungle to high alpine vegetation. The altitude of more than half the national territory is +1,000 m (3,300 ft). The central land mass is a plateau flanked by ranges of mountains to the east and west that lie roughly parallel to the coast. The southern part of the plateau includes Mexico City, the political, economic and population center of the country, located at an altitude of about 7,500 feet (2,240 meters), one of the highest cities of the world. The northern area of this plateau is arid and thinly populated, and occupies 40% of the total area of Mexico. The Mexico City metropolitan area has an average mean temperature of 63°F (17°C), with occasional lows of around 32°F (0°C) in December and January and highs near 86°F (30°C) in April or May before the beginning of the rainy season.

History For more than 300 years Mexico was ruled as a tightly controlled colony of . Independence in 1821 was followed by decades of struggle for political power and slow economic development, until the 30 years of internal peace achieved under Porfirio Díaz around the end of the 19th century. During this period, the great haciendas, huge areas of land used for cattle raising and farming, reached their peak, although with little improvement in the economic condition of the great majority of the people. The of 1910 was followed by more than ten years of civil war, which almost completely destroyed the agricultural economy of the country. Accordingly, although Mexican cultural, social and political life reflects the cumulative development of more than 10 centuries since the Spanish conquest and the earlier Aztec, Mayan and other civilizations, the economy of modern Mexico is only some 90 years old, originating in the late 1920s.

2 Tax and Legal Services - PwC Mexico Political system Mexico is now a federal democratic republic divided into 32 states, including the Federal 1 District (Mexico City). The federal government has somewhat greater powers than its counterpart in the United States, particularly in one area: the principal types of tax revenues are reserved to the federal government, which distributes certain revenues to the states. The chief executive is the President, who is elected for a period of six years and may not be re-elected. There is a bicameral legislature as well as a judicial branch. The mayor of Mexico City is elected by popular vote for a single six year term since 1997. The Legislative Assembly (formerly the Assembly of Representatives) of the Federal District is elected every three years. This assembly is empowered to issue ordinances regarding the day-to-day administration of the District. In view of the size and economic importance of the District, its annual budget is considerably larger than of any of the other states. For the last 16 years the Federal District has been governed by the PRD, a leftist socially focused political party. The state governments are headed by popularly elected governors, who also serve for single six-year terms. The states have their own legislatures and judicial systems.

Legal system In general, legislation follows the pattern of codified law originally based on the Napoleonic Code, with separate federal and state civil and other codes, in addition to separate laws and decrees covering specific subjects. Corporate law, as well as foreign investment, intellectual property protection, and income and value-added tax laws, among others, are federally created.

Population and social patterns Population The population of Mexico is estimated at approximately 112,000,000 inhabitants, reflecting a net annual increase in recent years of about 1.4%. Mexico is the most populous country in Latin America after Brazil. The total population of the country has more than tripled since 1940. There has been a substantial movement of people from rural areas to towns and larger cities. The urban population is now considered to represent well over 70.3% of the total. Although the average population density in the country as a whole is only about 57 inhabitants per square kilometer, that of the individual states of the republic varies widely, from about 8 inhabitants per square kilometer in the state of Baja Sur, in the southern half of the peninsula, to nearly 6,000 per square kilometer in the Federal District, consisting largely of the capital, Mexico City. Mexico City and its environs continue to be the largest and most concentrated population center, with a disproportionate of economic activity. However, some efforts have been made by both the federal and local governments to decentralize industry and foster the growth of other regional population and business centers.

Doing Business in Mexico 2015 3 Language Spanish is the national language of Mexico, understood and used by all but a very small number of indigenous tribes in the interior, although local languages are also spoken by fairly large numbers of the population in certain areas. English is also understood by many members of the business community in the capital and larger cities, as well as in the areas bordering the United States. Religion Mexico enjoys full religious freedom. Roman Catholicism was for a long time the state religion. However, the influence of the church has been greatly reduced since the separation of church and state in the 1860s. A majority of the population still consider themselves active members of the Roman Catholic Church. Education The Mexican federal and state governments provide universal free education through six years of primary school,three years of secondary school and three years of preparatory school, as well as preschool. The federal government also provides the funds for the three largest universities in Mexico City, which, however, operate as autonomous entities. These universities also have established their own preparatory schools that provide education before the university level. Many state governments also finance schools and universities. Students are charged small fees at the preparatory schools and universities. A large number of private schools and colleges, as well as full-fledged private universities, some operated by religious orders, have also been licensed by the Ministry of Education. The tremendous increase in population has resulted in an enormous demand for new school facilities at all levels. The federal government spends 17% of its estimated expense budget to satisfy the education demand. Illiteracy has been reduced substantially in recent decades, but 6.9% of the population over 15 years of age is still classified as illiterate. Particularly in rural areas, many children are still unable to attend school regularly. Living standards As in most developing countries, the distribution of wealth between different segments of the population is uneven. The standard of living of those in upper- and middle- management positions is more or less comparable to that of persons occupying similar positions in companies of comparable size in the industrialized countries. However, the earnings of office, skilled, semiskilled, and unskilled workers are considerably below those of their counterparts in the industrialized countries. One of Mexico’s biggest challenges is to find gainful employment for its population. Government officials have estimated that more than 1,000,000 new jobs should be provided each year. Unemployment and underemployment levels are considerable and have increased in recent years, although no comprehensive statistical information is available. The unskilled labor pool is very large in many parts of the country, particularly outside Mexico City, where the labor force has proved to be easily trained for semiskilled and skilled jobs. The in-bond processing plants throughout the country often achieve productivity rates 20% to 30% higher than those in the United States. This is especially evident along the US border where the in bond industry started.

4 Tax and Legal Services - PwC Mexico Cultural and social life Mexico City is considered the most important center of Mexico’s very active 1 cultural life, particularly as regards art, museums, theaters, musical organizations, book publishers, and libraries. Similar facilities, although less numerous, are also available in the other principal cities and state capitals. There has been an increasing trend toward participation in many types of sports, and facilities for spectator sports are widespread. National tourism by automobile, bus and airline has become a major part of the overall travel industry, particularly during school vacation periods. The many resorts on the coastlines and in the interior, as well as Mexico’s numerous colonial cities, typical town and archaeological sites are the preferred destinations. Foreign tourism has also been increasing, with Mexico becoming one of the world’s preferred tourist destinations in the 14th place (source: Sectur).

The Economy General description Mexico has a mixed economy, with the government, its agencies and government-owned or -controlled companies expected to reduce their traditionally dominant position in the areas of telecommunications, public utilities and petroleum. This would be more evident as Mexico is gradually changing with the energy and telecommunications reforms. Private enterprise is the principal factor in manufacturing, mining, commerce, entertainment, and the service industries, including construction and tourism. During the 80´s and 90´s the government sold to private enterprise a number of its holdings in what are classified as non-strategic industries. Foreign investment is found most frequently in the manufacturing, mining and financial sectors. The economy is fairly broad-based and dedicated mainly to supplying the needs of the large and rapidly increasing population. However, proximity to the United States also provides a large market for the export of manufactured and semi-manufactured goods, as well as substantial income from foreign tourists. Federal taxes on oil production and export provide a substantial portion of the total resources of the federal government. The foreign is quite significant, amounting to approximately USD$146.8 billion as of April 2014. The public portion of the debt has been renegotiated several times, and Mexico is current as regards payments of interest and principal on the debt. Moreover, Mexico has sufficient resources, in its international reserves (USD$188.8 billion in April 2014), to cover its external debt due in future years. Several steps have been taken to control inflation levels. The contributions of the various sectors to GDP are shown in Table I.

Doing Business in Mexico 2015 5 Inflation In recent years, the inflation rate dropped to one digit and may be considered comparable with Mexico’s commercial partners (i.e. US and ). For 2007, the inflation rate was 3.76% and in 2008 it was 6.53%. The inflation rate for 2009 is 6.17%, and 4.40% for 2010, 3.82% for 2011, 3.57% for 2012 and the inflation rate was 3.97% for 2013. The estimated inflation rate for 2014 is 3.75% (as of May 2014). Mineral and energy resources Mexico has become the world’s tenth most important exporter of crude oil. However, proven reserves have been decreasing in recent years, mainly because of the lack of exploration. Recent new discoveries have been announced that may convert Mexico again into one of the most important oil producers and exporters in the world, although substantial investment will be required. Oil production and exports averaged about 2.9 million barrels per day, during 2012. These export levels are expected to continue, in part because of the rather unstable world market. Moreover, Petroleos Mexicanos (PEMEX), the government-owned oil company, has been obliged to reduce its rate of drilling new wells in line with the general reductions in government expenditures. However with the energy reforms the oil production and export is expected to lead the economic uptrend of the Mexican economy in most areas of the oil and gas (and electricity) industries.

I—GDP by Sectors, 2011- 2013 (In MXN millions) Sector 2011 %% 2012 % 2013 %

Agriculture, fishing, 470,780 3.24% 532,498 3.41% 540,278 3.35% livestock, forestry

Mining 1,298,146 8.92% 1,321,570 8.46% 1,219,998 7.58%

Electricity, water and 156,570 1.08% 251,051 1.61% 258,033 1.60% gas services

Construction 1,152,544 7.92% 1,231,097 7.88% 1,165,301 7.24%

Manufacturing 2,393,798 16.45% 2,701,545 17.30% 2,754,789 17.11%

Commerce, 2,172,857 14.93% 2,356,321 15.09% 2,513,949 15.61%

Transportation, freight 860,889 5.92% 946,076 6.06% 997,196 6.19% and storage

Mass media 347,783 2.39% 349,485 2.24% 356,524 2.21%

Financial services and 452,489 3.11% 472,753 3.03% 510,496 3.17% insurance

Other 5,090,566 34.99% 5,443,292 34.86% 5,702,417 35.41%

Total GDP 14,550,014 100% 15,615,012 100% 16,104,402 100.00%

Source: Study of Public Finances Center, Chamber of Deputies. / Centro de Estudios de las Finanzas Públicas, Cámara de Diputados. Banco de México.

6 Tax and Legal Services - PwC Mexico The principal benefits to the country from the oil industry under the pre-reform system are its export earnings and the very substantial amounts transferred to the federal 1 government as excise tax payments, which account for a considerable portion of total tax collections from all sources. With the energy reform, the expectation would be that production will increase and that additional investments in both up-stream and down-stream activities will bring new employment and economic growth. Mexico is also endowed with other mineral resources, including substantial quantities of silver (one of the world’s largest producers), copper, lead, zinc, gold, sulfhur and fluoride, as well as deposits of coal, iron ore and manganese. The mining industry is one of the oldest in Mexico, having become important in the Spanish colonial era, but local risk capital for this industry has been in short supply. Accordingly, exploration work is sometimes financed by foreign investors, who then seek local partners or make direct investment in the mine construction when an apparently commercial ore body is located. With the increase in prices of minerals investments have been growing in this sector. As part of the 2014 tax reform, the legislature passed new taxes on mining, a measure that might affect new mining investments. The production and distribution of electric power in Mexico are controlled by the Federal Electricity Commission, which has been forced to increase its generating capacity in order to keep up with increasing demand. About 22% of its capacity comes from hydroelectric plants; the balance is largely from gas- or oil-burning plants. However, the 2014 Energy reform will be changing the business model of this industry. Agriculture, livestock, fisheries, forestry A relatively large segment (about 154%) of the total working population, yet decreasing, continues to be employed in agriculture, cattle raising, forestry, and fishing. Direct foreign investment in these areas has been very limited because of former constitutional and other restrictions. Only a small portion of the land can be considered first-class agricultural land, especially because of lack of rainfall in the northern part of the country. However, has considerably increased the amount of land under cultivation, and in a normal crop year Mexico is largely self-sufficient in food, except for deficiencies of wheat and corn. The principal agricultural exports have been tomatoes, broccoli, onions, mango, peppers, avocados, and other vegetables. Efforts to improve productivity and standards of living in many agricultural areas have been hindered by a lack of modern agricultural equipment and know-how. Privately owned farms have usually been small because of former strict limitations in the Mexican Constitution on the maximum area that could be owned by a single individual (in the case of irrigated land, for example, 100 hectares). During the first half of the 20th century, much of the arable land was expropriated for the establishment of cooperative farms (ejidos).

Doing Business in Mexico 2015 7 However, because of a sweeping amendment to the country’s constitution and the enactment of a new agrarian law in February 1992, the legal framework governing land ownership has been significantly liberalized. The most important features of this legislation are the following. • Ejidatarios, i.e., farmers who merely had the right to use cooperative farms (ejidos), may, in certain cases and following legal procedures, own the land outright, and it may be leased, sold or otherwise transferred. • Ejidatarios may enter into many kinds of business associations with other ejidatarios or with third parties. • Corporations may own farm, grazing or timber land with a maximum area of 25 the maximum allowed for individual farmers (ejidatarios), subject to certain limitations. • Foreign investment is permitted in these corporations up to 49%, represented by series “T” shares, i.e., shares representing the contribution or acquisition of land. • Expropriations to distribute land among the landless will no longer be decreed. Manufacturing The principal manufacturing industries include automobile and auto parts producers, steel manufacturers, textiles, food processing, breweries, glass, chemicals and petrochemicals, and cement and other materials for the construction industry. Many companies are improving their products and quality control in order to be able to export. Competition from foreign manufacturers for consumer goods has increased because of the reduction in import duties and the elimination of requirements for prior import permits for most products currently prevailing in the Mexican open economy environment. As a consequence of the above-mentioned lowering of import duties and the reduction of non-tariff barriers in Mexico, manufactured goods have increased in significance and have surpassed oil as the principal export item. In-bond processing industry Mexico’s in-bond processing industry, the maquila companies or maquiladoras, may have shown the highest growth rates of any industry in some recent past years. These companies are usually wholly owned by a foreign corporation with which the maquiladora contracts to produce subassemblies or semi-finished or finished goods for shipment to the foreign company. The latter provides most of the necessary machinery and equipment and furnishes the principal raw materials or parts to be processed or assembled, all of which are usually imported duty-free under bond and remain the property of the foreign company. The principal advantages of this method of operation, referred to as “production sharing,” arise from the favorable labor market in Mexico, with its lower wage rates (expressed in U.S. dollars), compared with those in the industrialized countries. These companies assemble or finish a wide range of different products, the most important of which are electric and electronic materials, equipment and apparatus and automotive equipment and supplies. The incentives available to these companies are discussed under “In-bond processing industry” in Chapter 4.

8 Tax and Legal Services - PwC Mexico Service industries The service industries form a major part of the economy, with the commercial sector 1 alone accounting for a large percentage of GDP. The commercial banking system was nationalized in 1982. However, it was reprivatized eight years later. Many foreign banks have since established Mexican subsidiaries since the signature of NAFTA, some with limited activities. Currently most banks and all stock brokerages and insurance companies are privately owned. Several major telephone companies have obtained concessions from the federal government to operate long-distance telephone and wireless communication services. There is growing foreign ownership in the wholesale and trades. Although a few of the largest wholesale and retail trade companies are listed on the , most are closely held by family corporations. Tourism Largely because of many lovely bays on its extensive coastlines, its numerous archeological sites and its tropical and semitropical climate, Mexico has developed a substantial tourist industry, handling more than 23 million foreign tourists per year, mainly from the United States, in addition to those who merely visit the border zone. Substantial foreign investments have been made in properties in the resort areas. Transport and communications The system of paved highways in Mexico has been expanded considerably. Concessions to private enterprise to build and operate modern toll roads greatly expanded the system, which connects all major cities in the country and most of the smaller urban areas, as well as several points on the borders with the United States and . Privately owned Mexican airlines offer numerous flights connecting most of the cities. These and many of the larger international airlines maintain regular service between Mexico City, some of the other large cities and principal resorts, and many cities in the United States and the rest of the world. The national railroad network was operated by the federal government for many years and was the largest freight carrier in the country. In 2001 the privatization process started, and now the railroad network is operated by private companies. Considerable amounts of freight are carried by the many licensed truck lines, a business limited by law to Mexican nationals operating as individuals or cooperatives. Many intercity bus lines now carry a lot of passengers, and large modern bus terminals have been opened in Mexico City and other locations.

Doing Business in Mexico 2015 9 Foreign trade and balance of payments Foreign trade is very important to Mexico in order for it to service the large external debt and to obtain the machinery and equipment needed for industrial development. See Tables II and III for merchandise exports and imports, respectively.

II—Merchandise Exports, 20011 to 2012 (In USD millions)

2011 % 2012 % 2013 %

Total Exports 349,433 100 370,770 100 380,027 100

Petroleum products 56,443 16 52,956 14 49,493 11 Non-Petroleum Products 292,990 84 317,814 86 339,534 89

Total Exports 349,433 100 370,770 100 380,027 100 Petroleum products 56,443 16 52,956 14 49,493 11 Non-Petroleum Products 292,990 84 317,814 86 339,534 89 Manufacturing 202,734 81 219,685 81 230,840 79 Source: National Institute of Statistics and Geography / Instituto Nacional de Estadística y Geografía, INEGI.

III—Merchandise Imports, 2011-2013 (In USD millions)

2011 % 2012 % 2013 % Total Imports 350,843 100 370,752 100 351,057 100 Consumer goods 51,790 15 54,273 15 52,577 15 Intermediate goods 264,020 75 277,911 75 262,664 75 Capital goods 35,033 10 38,568 10 35,816 10 Source: National Institute of Statistics and Geography / Instituto Nacional de Estadística y Geografía, INEGI Revenue from exports of crude oil and natural gas increased substantially up to 2008 due to the rise in world prices for petroleum, since export volumes have not changed materially. On the contrary, volumes have decreased because of insufficient investment in new wells. Exports of non-petroleum manufactured goods, particularly automobiles, motors and parts, also have increased substantially in recent years because of very significant investments made by most international organizations in this industry. Mexico’s principal trading partner continues to be the United States, which normally receives between 70% and 85% of Mexican exports and is the source of a similar percentage of imports, as well as even larger percentages of border transactions, tourist expenditures and income from the in-bond processing industry. Other important trading partners include Spain, Japan, Germany, the United Kingdom, France, Canada, and the . As a result of the opening up of the economy, trade has increased in recent years and currently the unfavorable trade balances has been significantly reduced , as shown in Table IV.

10 Tax and Legal Services - PwC Mexico IV— Balance of Trade, 2011-2013 (In USB billions)

2011 2012 2013 1

Export of goods 1,499.2 1561.7 1,592.8

Export of services 627.8 654.9 687.4 Total Exports 2,127.0 2,216.6 2,280.2

Import of goods 2,239.6 2,303.8 2,294.5 Import of services 435.8 450.4 462.1 Total Imports 2,675.4 2,754.2 2,756.6 Net trade deficit 548.4 537.6 476.4 Source: National Institute of Statistics and Geography / Instituto Nacional de Estadística y Geografía, INEGI.

The United States also provides the major portion of the income of the in-bond processing companies and net income from tourism. The annual balance of payments for 2011 to 2013 is shown in Table V. As a result of recent administrations’ policies of continuing to open up the Mexican economy to private investment, both domestic and foreign, including major reforms on energy and telecommunication and of reprivatizing certain sectors of the economy, coupled with the need to create jobs and the international prices for oil, the expected trends in the Mexican economy are as follows: • Increased participation of private investment in new projects, including innovative approaches in such sectors as telecommunications, oil and gas, infrastructure and highways, air transportation, petrochemicals, railroads, auto parts and power generation and utilities. • Constant increases in the export of manufactured and semi-finished goods as a percentage of total exports. • Consistent growth of the in-bond processing industry. • Growing demand for skilled workers and for trained managerial and professional people. • Control of inflation, keeping it at manageable levels.

External debt Mexico’s external debt amounted to approximately USD$258.5 billion at December 2013. Mexico is current in its payments and recently Mexico’s rating has remained high.

Doing Business in Mexico 2015 11 V—Balance of Payments, 2011-2013 (In USD millions)

2011 2012 2013 Current Account -12,556.0 -15,058.2 -18,847.8 Income 399,248.0 423,445.7 422,645.7 Expenses 411,804.0 438,503.9 441,493.4 Balance of trade -1,467.8 -45.8 -2,770.6 Export of goods 349,375.0 370,705.8 369,422.0 Petroleum products 56,385.1 52,891.6 51,416.2 Non-petroleum Products 292,990.0 317,814.1 318,005.9 Agriculture 10,309.5 10,914.2 10,879.9 Mining 4,063.5 4,906.5 4,710.3 Manufacturing 278,617.1 301,993.4 302,415.6 Import goods 350,842.9 370,751.6 372,192.7 Consumer goods 51,790.2 54,272.4 55,100.6 Intermediate goods 264,020.2 277,911.1 278,399.2 Capital goods 35,032.4 38,568.1 38,692.9 Services Balance -34,061.7 -37,571.3 -38,159.0 Transfers from abroad 23,151.8 22,768.3 22,210.4 Transfers abroad 178.2 209.4 128.6 Net Transfers 22,973.6 22,558.9 22,081.8 Capital account 50,786.8 54,462.9 46,559.7 Liabilities 61,515.3 88,502.4 100,261.5 External Debt 210,871.1 227,322.7 258,559.6 Foreign Investment 48,440.0 74,144.9 69,965.0 Direct investment 23,354.4 17,628.3 19,744.4 Portfolio 25,085.6 56,516.6 50,220.6 Capital market -6,565.9 9,876.7 7,883.6 Money market 31,651.5 46,639.9 42,337.0 Assets -10,728.5 -34,039.5 -53,701.8 Errors & omissions -9,793.2 -18,681.9 -9,918.3 Valuations adjustments -441.3 -317.2 1,095.5 Variation in Foreign Exchange 28,878.9 21,039.9 16,698.1 Reserve Foreign Exchange Reserve 142,475.5 163,591.8 176,578.7 Source: Study of Public Finances Center, Chamber of Deputies. Bank of Mexico / Centro de Estudios de las Finanzas Públicas, Cámara de Diputados. Banco de México

12 Tax and Legal Services - PwC Mexico Hints for the business visitor Visitors’ visas 1 Business visitors traveling to Mexico to plan, supervise or carry out business operations should enter the country with a non-immigrant visa as a visitor employed by a foreign company or self-employed, and is prohibited from receiving remuneration from Mexican sources. Such visas can be readily obtained from Mexican consulates in foreign countries. A simple tourist card or tourist visa in a valid passport does not authorize a foreign visitor to engage in business operations. Further information about immigration requirements for foreigners desiring to work in Mexico is given under “Foreign personnel working in Mexico” in Chapter 10. Currency Exchange Transactions involving foreign currency are not subject to any kind of exchange control, and all currencies may be freely held, transported or traded by anyone but certain reporting requirements apply to travelers and to the financial sector. The peso exchange rates quoted in Mexico as of March 2014 for transfers to and from Mexico’s principal trading partners by check or other documents are shown below.

1unit = MXN USD 12.93 EUR 17.73 JFY 0.1278 GBP 22.1279 CHF 14.38 CAD 11.84 Source: Bank of Mexico / Banco de México (Banxico)

International time Most of the country is on the equivalent of U.S. Central Time Greenwich Mean Time minus six hours. The far northwest of Mexico is on U.S. Mountain Time and the peninsula of Baja California is on U.S. Pacific Time, one and two hours earlier, respectively. In the summer months, Mexico is on daylight saving time. From April to October the clock is advanced one hour throughout the country. Business hours Business offices normally open at 8:30 a.m. or 9:00 a.m. for an eight-hour working day, with one or two hours for lunch. The two-hour lunch period is almost universal outside Mexico City. Some banks are open from 9:00 a.m. to 04:00 p.m. and others up to 7:00 p.m. The official working hours for government offices are 8:00 a.m. to 2:30 p.m. but have been extended to 7:00 p.m. in many departments. All these hours are for a five-day week. Factories usually open at 7:00 a.m. or 8:00 a.m. and work eight-hour shifts, with a half-day’s work on Saturday, although a five-day week is in use in some cases.

Doing Business in Mexico 2015 13 Statutory holidays The federal labor law establishes the following obligatory holidays throughout the country: January 1, February 5, March 21, May 1, September 16, November 20, and December 25. December 1 is an obligatory holiday every six years for the inauguration of a new presidential period, Some of these dates are moved to the nearest Monday. Religious holidays are also observed by most business offices, banks and large stores, including the Thursday and Friday of Easter week, November 1 and 2, and December 12. These and other holidays are often agreed on in collective labor contracts. Weights and measures The use of the metric system is compulsory in Mexico. Dates and numbers In writing dates, the day is usually placed before the month, and Roman numerals are often used to indicate the month, i.e., 31/V/14 for May 31, 2014. A decimal point is used to denote fractions of the monetary unit which is normally represented by the “$” sign; commas indicate thousands, millions, etc., as in $3,000.92. Business information services See Appendix XVI for a listing of the addresses of various agencies providing information services to persons interested in doing business in Mexico. Local customs Business relationships tend to be somewhat more formal than in other countries, and the use of first names, particularly in the northern border zone, is not as widespread. Meetings with customers and advisors are often held at breakfast or luncheon; the latter can sometimes be quite lengthy.

14 Tax and Legal Services - PwC Mexico Chapter 2 Business environment 2 Investor considerations • Currently Mexico has a broad free-trade agreement network that includes North America, the European Union, Japan and some South American countries and has substantially reduced tariff and non-tariff barriers to free trade between Mexico and those regions. • Almost all non-strategic government assets have been privatized. • Foreign investment is welcome and can be made in a wide variety of forms. • Strong government efforts to reduce inflation have placed Mexico at a level comparable to the top economies in the world. • Internal interest rates have been stable. • Mexico has a common border with the United States, one of the largest markets in the world. • Government policy encourages exports and establishment of in-bond processing operations. • Young, skilled, moderate-cost labor force. • Public/private sector cooperation. • No exchange controls exist, exchange rates are determined by supply and demand and foreign currency is freely available. Industrial climate Private investment is dominant in the manufacturing, construction and hospitality industries, as in wholesale and retail trade operations. The federal government has intensively promoted the establishment of manufacturing operations for export and labor-intensive industries, such as in-bond manufacturing and tourism, taking advantage of the relatively low wage costs expressed in U.S. dollars and the proximity to the US market.

Framework of industry Most domestic small are operated as unincorporated units, although many of the larger units are organized as family- owned corporations. A few of the larger businesses have gone public by listing in the Mexican Stock Exchange. The main government investments are directed to utilities, water supply and irrigation, the electrical system, petroleum and basic petrochemical industries. However, major reforms have now made it possible for private investment in most of these sectors.

Doing Business in Mexico 2015 15 Focus of government policy For many years the focus of Mexican government policy has been to raise the living standards of its people, promoting industrialization and creating jobs for the fast growing population to reduce under- and unemployment levels. President Enrique Peña Nieto’s administration has similar goals, but has embarked in a historically unprecedented reform to modernize the country in all sectors. Reforms have been proposed or passed in education, energy, telecommunications, political administration, tax, health, labor, among many others. Economic development plans The Mexican government implemented an economic development plan to achieve industrial development and expansion and increase exports, in order to decrease dependence on oil revenues, at the same time reducing and maintaining inflation at competitive levels. To attain these goals, Mexico opened up its economy by joining the General Agreement on Tariffs and Trade (GATT) (now the World Trade Organization– WTO), eliminated trade barriers and reduced tariffs, adopted a reprivatization policy, and relaxed foreign investment restrictions. In addition, Mexico has in place several free-trade agreements such as the North American Free Trade Agreement (NAFTA), with the European Union, with Japan and with many other countries which represent strategic investment or market opportunities. Regional/special industry development Some State governments are willing to grant incentives to attract new industries to specific areas within their borders, often in the form of reduced prices for land for industrial use and reductions in property and payroll taxes. Free-trade zones There are no free-trade zones in Mexico. However, limited duty-free zones are maintained in the entire states of northern and southern Baja California, the city of , a triangular area in the state of , and certain areas in the southern part of Mexico. Materials and goods, with certain exceptions, may enter the zones free of duty, unless they are to be shipped to other parts of Mexico. Financial services Trade agreements and Foreign Investment Law reforms have significantly reduced limitations to foreign investment in the financial services industry. Thus the Mexican banking system is now operated mainly by international financial corporations, such as Citibank, HSBC, BBVA, Santander, etc.

16 Tax and Legal Services - PwC Mexico Public/private sector cooperation As part of the participation of the public sector in the local economy, the government- owned and -operated development banks, such as Nacional Financiera, S.N.C. and Banco Nacional de Comercio Exterior, S.N.C., have been acting as a complement to the private 2 financial sector, to promote saving and investments , the development of the financial system and the growth of industrial and infrastructure projects. Under the Financial Reform to be applied during 2014, the mandates of the development banks broaden, and made it more prone to provide financial assistance to SME´s and lower income population. Foreign investors receive full cooperation from the National Commission on Foreign Investment, and those wishing to establish or expand in-bond processing companies can find support from the Division of Foreign Trade, both of which form part of the Ministry of the Economy.

Labor/management relations Because of the fast-growing population of the country in the last century, Mexico has a young labor force. Most companies find that, with adequate training programs, the skills of inexperienced workers can be readily upgraded and high-quality work is obtained, sometimes with somewhat more on-the-line supervision than is customary in more industrialized countries. In-house training is used at skilled and managerial level. For many years has clearly favored employees in their relations with management. National labor unions have become quite strong in a number of industries, particularly petroleum, telephones, electricity, mining, airlines and entertainment. Labor law grants the right to form a union for collective-bargaining purposes to groups of 20 or more employees. Collective labor contracts are signed by almost all industrial companies. Nevertheless, satisfactory labor relations are maintained at most companies. Fringe benefits, including mandatory profit sharing to employees and social security premiums to cover current medical expenses and retirement pensions, are usually a significant portion of labor costs, often about one-third of the total. See Chapter 10 for a more detailed discussion. Fringe benefits, including mandatory profit sharing to employees and social security premiums to cover current medical expenses and retirement pensions, are usually a significant portion of labor costs, often about one-third of the total. See Chapter 10 for a more detailed discussion.

Doing Business in Mexico 2015 17 Overseas trade relations Membership in trade blocs Mexico joined the GATT (currently WTO) in 1986. This membership, as well as reductions in import duties and formalities adopted in 1988 as part of the effort to control internal inflation, has increased the volume of merchandise imports/exports to/ from Mexico. Mexico is also a member of the Latin American Integration Association, which provides for reductions in duty rates on merchandise imports from members of the association. The North American Free-Trade Agreement (NAFTA) has been in effect since January 1, 1994. In addition, in July 2000, Mexico and the European Union entered into a multilateral free-trade agreement substantially reducing tariff and non-tariff barriers to free trade between the two regions. Mexico has also entered into free-trade agreements with , Venezuela, Bolivia, Costa Rica, , , Guatemala, Honduras, , Israel, Uruguay and the European Free Trade Association (Iceland, Norway, Lichtenstein and Switzerland). In addition, an Economic Association Agreement with Japan has been in force since April 2005. Exports Mexico provides some incentives for exporters. The main tax incentive is the zero rate of value-added tax (VAT) applicable to exports and the consequent right to the refund of VAT charged by others on materials, supplies and services used in the production of exports or the credit of such charges against a company’s VAT liability for its activities subject to the tax. Trade barriers In previous years, industrialization in Mexico was extensively promoted as a mean for eliminating imports, and considerable protection was granted to the new local industries in the form of high import duties on competing products, the requirement of prior import permits or outright prohibition of such imports. Mexico’s entrance into GATT, its free-trade agreement network, its efforts to reduce inflation by facilitating imports since 1988 and the improvement in Mexico’s balance of payments have all resulted in reductions or eliminations of trade barriers, and this trend is expected to continue. The requirement of a prior import license or permit has been repealed, except in special cases, such as for strategic minerals, e.g., uranium. Import duties have been drastically reduced from an average of 100% to around 8% or even lower.

18 Tax and Legal Services - PwC Mexico Chapter 3 Foreign investment and trade opportunities

Investor considerations 3 • The government has a favorable attitude toward foreign investment. • Foreign investment is restricted only in certain strategic activities reserved to the state or Mexican investors. With a recent law reform some of the restricted sectors will gradually allow foreign investment under specific forms. • Trade policy wide open. NAFTA and other trade agreements with many developed and developing countries are in place. • Mexico is a member of the Organization for Economic Cooperation and Development (OECD), the World Trade Organization and the Asian-Pacific Economic Cooperation Mechanism (APEC). • The inflation rate during recent years has been around 4%.Mexico has been able to control inflation, keep a relatively steady , stabilize the economy in general terms and, above all, maintain the investor’s confidence. • No exchange controls. • The labor force is large. • Antitrust law could impose investment restrictions on market concentration for any foreign and domestic investor. • Many laws have been updated or reformed with the purpose of modernizing the legal system and to facilitate international trade activities. • The Telecommunications Reform provides that direct foreign investment in telecommunications and satellite communications goes to a fully 100% and radio and television broadcasting to 49% with certain requirements. • The proposed Energy Reform establishes a new legal framework for oil, gas and electricity activities, effectively opening these markets to private foreign and local investors to engage in the exploration and extraction, transport, storage, distribution, importation, and exportation. • The Railroad Law allows foreign investors to participate with up to 49% of the capital stock in companies providing railway service. Railroad activity with more than 49% foreign participation requires prior authorization from the Foreign Investment Commission. • The Airport Law allows 49% foreign ownership in the construction and operation of airports located in Mexico. This requires prior authorization from the Foreign Investment Commission.

Doing Business in Mexico 2015 19 Investment climate Government attitude toward foreign investment In general, the government’s attitude is to encourage foreign investment, particularly when new skills or manufacturing techniques are brought in, except in the few remaining fields reserved to the government or Mexican nationals as noted in Chapter 5. Foreign investors receive the same treatment under Mexican law as domestic investors. Prior foreign investment law imposed performance commitments, including a requirement to maintain a positive balance of payments. These requirements generally no longer apply, and entities established under prior law can request a waiver of the commitments from the Foreign Investment Commission. The foreign investment law in force (Ley de Inversión Extranjera) specifies which activities are reserved or restricted and, in the latter case, the maximum percentage of foreign investment allowed (see Appendix IV). It also specifies those activities that require prior authorization from the Foreign Investment Commission to increase foreign participation above the levels approved. Currently, for example, the automotive and construction industries are not considered to be restricted activities; therefore, 100% foreign investment is permitted in companies engaged in such activities. Any company, regardless of the nationality of its owners, must obtain written permission from the Ministry of Economics in order to use a specific corporate name. On the other hand, companies with foreign investment have the obligation to register with the National Foreign Investments Registry regardless of the foreign investment percentage. The administration has recognized the need for substantial private capital investment to provide additional employment opportunities and to increase industrial production in Mexico for local consumption and for export. In general, foreigners may operate in Mexico in many ways, including through licensing agreements, by exporting goods to Mexico or through local manufacturing. Joint venture contracts can also be used for minority investments in short-term projects. See Chapter 9 for a discussion of corporate vehicles available. Trade policy Mexico has kept a progressive trade policy and has made substantial reductions in import duties and trade barriers. This trend has continued toward more-nearly free trade to facilitate the export of Mexican manufactured products, as evidenced by the signing of free-trade agreements with many countries and by ongoing negotiations to conclude free-trade agreements with other nations. Mexico was a founding member of the Latin American Free Trade Association (LAFTA) and its successor organization, the Latin American Integration Association (LAIA), in accordance with this and the many other trade agreements under which many Mexican- source products can often be shipped to other member countries at reduced import duties. Taxation policy The Mexican tax system has been significantly reformed and, as from 2014, corporations are taxed at the rate of 30% on taxable income, while foreign investors and resident individuals are subject to tax on their dividend income at the rate of 10% (or lower tax treaty rate).

20 Tax and Legal Services - PwC Mexico This system is relatively competitive when compared to Mexico’s major trading partners and with developing countries seen as competitors for attracting Foreign Direct investment. With the previously mentioned reform, the former flat tax (called IETU) has been repealed, which makes the Mexican tax system simpler. There are some tax incentives specifically designed to attract foreign investment, mainly around the in-bond manufacturing (maquiladora) industry. 3 With more than seventy double tax conventions in force and always in the process of broadening its treaty network, Mexico is able to resolve taxation issues with all its significant trading partners, providing an effective instrument to solve differences in tax treatment among foreign investors and their governments. Local competitor attitude toward foreign investment Most local businessmen tend to favor foreign investment in Mexican industry as strengthening the private sector and react very favorably to opportunities to invest in joint venture companies with established foreign companies. Successful Mexican industrialists generally prefer joint investments with foreign companies that can make modern technology available and that will act as technical partners, with local marketing and administration to be supervised by the local industrialists. Labor attitude toward foreign investment Organized labor does not officially oppose foreign investment and, in fact, may actually prefer to deal with the management of companies having substantial foreign capital, on the grounds that such companies tend to be more amenable to the collective- bargaining process.

Special investment opportunities Moderate labor costs (when expressed in U.S. dollars) have made the establishment of in-bond processing plants to handle labor-intensive operations increasingly attractive to foreign investors. Moreover, foreign investors are also finding it advantageous to utilize their knowledge of world markets to organize Mexican companies to export locally manufactured goods, not only to the United States and other trading countries, but to customers in other parts of the world as well. Nevertheless, Mexico’s large and still increasing population has resulted in considerable demand for all types of consumer goods, including durable goods and, in particular, basic necessities. As the formerly high rates of inflation have been reduced, the volume of effective local demand has increased substantially. This environment, together with the previously mentioned reductions in customs duties and in other trade barriers offers an interesting market and trade opportunities for exports to Mexico, as well as for local production. The two largest unsatisfied local markets are probably those for agricultural equipment and housing, particularly low-cost units. There may also be an improved market for importing machinery and equipment to Mexico. Most of the direct foreign investment in Mexico is allocated to four industrial sectors: automotive, petrochemical, apparel, and electronics. Wireless telephone service is one of the fastest-growing areas of the electronics industry.

Doing Business in Mexico 2015 21 Franchising is another industry showing marked growth. Franchise firms have contributed significantly to Mexico’s economy by helping create more firms that provide goods and services. Mexico is still one of the world’s key sources of minerals. The mining industry has been one of the few to continue growing during the period of economic crisis. The industry is going through a modernization period, and foreign participation is allowed. Recently with the increase of demand, new investments have been made in the mining industry. The 2014 Energy Reform amends the Mexican Constitution to allow the participation of private investors in electricity, exploration and extraction of oil and gas via contracts or public assignments, as well as to transform PEMEX and CFE as State Production Entities. Mexican Government will be able to engage with private parties and State Productive entities through different types of contracts (service, profit sharing, shared production, licenses or a combination of them) and will determine the contractual model in each case. This Reform will provide opportunities across the energy value chain, from upstream exploration and production through midstream, distribution and refining, as well as infrastructures for electricity generation and transmission. Mexico’s telecommunications reform represents a bold and aggressive step to remove barriers to competition, to improve the delivery of key services, and enhance the opportunity for innovation and productivity gains. As mentioned, foreign investments in telecommunications and satellite communications activities are fully open and radio and television broadcasting (which formerly was prohibited) allow 49% of foreign investment subject to certain requirements. This reform represents an important opportunity for investors to participate in these businesses on markedly different terms than those previously available and with full control over their own strategic direction, intellectual property, and financial investment. The partial opening of the broadcast media sector is a substantial step in the direction of greater competition.

22 Tax and Legal Services - PwC Mexico Chapter 4 Investment incentives

Investor considerations • 100% foreign ownership is permitted in labor-intensive in-bond 4 processing entities (herein Maquiladoras or IMMEX companies) and in most other activities. • No free-trade zones exist in Mexico. • Specific duty deferral programs allow temporary imports (under the IMMEX program), besides strategic bonded warehouses, which bring additional benefits. • Incentives are not offered for establishing international financial center operations. • Mexico is not a tax-haven country; its tax rates are comparable to those of both developed and developing countries. • The Mexican government has a policy and procedures that aim to simplify the setting up of a company, including the reduction of formalities and time for issuance of authorization resolutions.

Investment policy It has been the general policy of the Mexican government to eliminate tax incentives and to grant them only on a selective basis.

Tax concessions No special tax concessions are offered to encourage foreign businesses to locate in Mexico. However, special tax incentives are granted to taxpayers that wish to contribute to qualified film and theatre projects and to taxpayers who are involved in the agriculture, livestock, fishing, or timber industries.

Doing Business in Mexico 2015 23 Regional incentives Regions affected Most regional incentives available have gradually been repealed. However state and local governments may be authorized to grant certain incentives or benefits within their jurisdiction. Tax incentives Regional tax incentives are very limited. A few States grant a reduction in real property or state payroll taxes to new industries established within the state. Non-tax incentives No regional non-tax incentives are granted at the federal level. Certain states donate land for plant sites or sell industrial sites at reduced prices, and guarantee the availability of public services, including electricity, water, transportation, etc. Earnings There are no state or local income taxes on corporate earnings.

Industry incentives Industries affected and eligibility The industries discussed below enjoy special incentives, regardless of size and with no restrictions as to their location or the foreign ownership of their capital. Tax incentives Agriculture, livestock, fishing, and timber Taxpayers engaged exclusively in these industries are subject to a special tax regime that provides exemptions based on the number of shareholders. Non-tax incentives Tourism industry The government has undertaken to stimulate expansion in the tourism industry in Mexico. Foreigners purchasing residential real estate are now allowed to own all rights, except bare title to land in the coastal areas or along the country’s borders. No restriction applies in the case of non-residential real estate in these areas, provided the real estate is acquired by a Mexican legal entity (regardless of the nationality of the shareholders/ partners), and provided notice is given to the Foreign Affairs Ministry within 60 (sixty) days after the acquisition takes place. A government trust, FONATUR, has made substantial investments in the infrastructure necessary for the development of a number of resorts. FONATUR sells beneficial rights to land in its resort areas for use for hotels, condominiums, shopping centers, etc., on relatively favorable terms and provides expert advice in planning such projects.

24 Tax and Legal Services - PwC Mexico Science and Technology incentive The National Council of Science and Technology (CONACyT) is the governmental entity in charge of promoting Research and Development of Technology (R&D) in Mexico; thus, it has been operating several programs with this purpose, such as the “Program to Incentive Innovation”. This national program summons micro, small and medium enterprises (MIPYMES), big companies and individuals with business activity, duly registered in the RENIECYT 4 (CONACyT’s internal registry) with R&D projects focused on the creation of specialized jobs, green ideas, competitiveness, innovation and added value. The most important issues to consider related to this Program are: • Due date to file application: For 2015, the period is expected to open in September • Companies will be able to request financial support for the projects developed during the current business year. It is important to consider that this support is subject to budgetary guidelines. • Maximum amount of support per company $36 million pesos. • In addition to the information requested in the application, companies must have a feasibility study, a plan of activities and an annual and per project budget, a strategy for the appropriation of the intellectual property and copyright, a description of the impact and benefit derived from the project, as well as an action plan for the exploitation of its results.

Schemes and characteristics The application could be filed under three schemes: • INNOVAPYME: Focused on the technological innovation of high added value for R&D projects filed by micro, small and medium size companies (MIPYMES), with an important impact on their competitiveness. Projects connected with research centers or universities will have priority. • PROINNOVA: Focused on the development and innovation of precursory technologies for R&D projects which are filed by MIPYMES or by large companies in a network that is integrated at least by one company and two research centers and/or universities. • INNOVATEC: Technological innovation for the competitiveness of R&D projects filed by large companies which cause productive chains regarding research and development of technology’s activities, and which bring about the investment in infrastructure (foundations and human resources) as well as the creation of new specialized jobs. Such projects which demonstrate connection with Centers of Research and/or Universities, will be given of priority. Earnings Refer to Chapter 17 for information on the taxation of dividends and remittance of earnings.

Doing Business in Mexico 2015 25 In-bond processing industry (Maquiladora industry) The Mexican government, in order to create more employment opportunities, has adopted certain policies that allow the establishment of 100% foreign-owned companies that process or assemble temporarily imported materials into finished goods for export as well as IMMEX Service Programs (such as share services centers, back office services and international IT Services). Such companies were first created in the border area between Mexico and the United States and may now be established anywhere within the country. The main regulations for the operation of the Maquiladoras are contained in the Decree to promote Manufacturing, Maquila, and Export Service Companies (IMMEX). Companies wishing to operate as IMMEX companies should be registered as such by the Ministry of the Economy (Secretaría de Economía), which will approve an operating program. The program will specify, among other things, the machinery and equipment that will be temporarily imported; the types of materials, components, etc., to be brought into the country for processing, assembly or supplying services during specified periods; and the technical and other types of assistance to be provided by the foreign contractor. In many cases, U.S. import duties are levied only on the value added in Mexico, but even without this advantage, substantial savings are achieved by carrying out labor-intensive processes in Mexico at substantially lower wage rates, while the initial and, possibly, the final operations are handled in the United States or any other Country. These companies make extensive use of the procedures for temporary duty-free (specific exceptions apply) imports mentioned above, and their fees for assembly services charged to non-residents are considered as subject to the zero rate tax under the Value Added Tax (VAT) law. These companies can process or assemble temporarily imported materials from several countries, not only the U.S.

Strategic Bonded Warehouse The Strategic Bonded Warehouse regime consists of introducing for a limited period of time, foreign, national or imported goods into authorized warehouses, with the purpose of being stored for safekeeping, exhibition, distribution or transformation or to be repaired. Authorized warehouses must be established next to a customs facility.

The main benefits of this regime are: Neither import duties nor countervailing duties will be paid, except for those cases contemplated within the Free Trade Agreements Rules. Non-tariff restrictions and regulations do not have to be complied with, except for those regarding animal and vegetable sanitation, public health, environmental and national security.

Industrial parks Industrial parks have been established in a number of areas all over the country to provide the needed infrastructure. Land is usually available in these areas on relatively favorable terms. Some states have donated land for new industry or sell it at relatively low prices.

26 Tax and Legal Services - PwC Mexico Free trade agreement The Mexican foreign investment legislation restrictions discussed elsewhere in this Guide (see in particular Chapter 5) are applicable to the entire country. Accordingly, no free-trade zones exist. Mexico, the United States and Canada signed a trilateral free- trade agreement commencing in 1994, and Mexico has entered into free-trade agreements with Colombia, Costa Rica, Nicaragua, Chile, the European Union, Israel, El Salvador, Guatemala, Honduras, Iceland, Norway, Liechtenstein, Switzerland, Uruguay 4 and Japan.

International financial center operations There are no tax concessions or treaties available to foreign corporations that establish regional, offshore or holding company activities in Mexico. Accordingly, Mexico should not be deemed a tax-haven country or a viable site for establishing an international financial center.

Export incentives The most significant benefits under the Mexican economic development plan are precisely those provided to promote the export of manufactured goods. These export benefits apply to all entities, regardless of size and degree of foreign ownership, and are provided in both tax and non-tax forms. A series of executive decrees, general application rulings and government communications have been issued both to constitute the entities entrusted with the task of promoting export activities and to grant the related incentives to exporters. A summary of the existing export incentives, as well as the official entities involved, is given below.

Ministry of the Economy (SE) export programs are as follows 1. Temporary imports of goods for subsequent export (IMMEX) Maquiladoras (mentioned in previous paragraphs). The Secretary of Economy (SE) created the Decree to Promote Manufacturing, Maquila and Export Services Companies (IMMEX) Entities exporting at least US $500,000 or 10% of their total sales may enter into an IMMEX program authorized by the SE and obtain the following benefits: • Temporary (duty-free) imports for up to 18 months (or 36 months for NEEC Companies1) for raw materials, supplies and packing materials used in the exported production. • Exemption from import duties on fuels, lubricants, spares parts and other consumables used in the production of goods to be exported. • As of January 2015, temporary importations will trigger VAT at a general rate (16%). An automatic credit of such import VAT may be obtained if a “Certification for VAT and Excise tax” is granted. • To enroll in this program, companies must be incorporated in Mexico and present a viable export project.

1 NEEC stands for its acronyms in Spanish of Nuevo Esquema de Empresa Certificada (New Scheme of Certified Entity)

Doing Business in Mexico 2015 27 • Companies may also be approved under a Sectorial Relief Program (SRP) to enable manufacturers to import raw materials, machinery or equipment applying reduced import duty rate regardless of their origin and with certain conditions. The life of an IMMEX program is indefinite as long as the company complies with the provisions, includin: • Issuing an annual report covering foreign trade operations related to the program. • Keeping an automated inventory record to control the merchandise imported and exported during the life of the program. • Exporting merchandise or changing the customs regime of raw materials in 18 months (or 36 months for NEEC Companies), at the latest. • All temporary imported goods under the IMMEX program must be kept in the domiciles that are registered. A zero rate value-added tax (VAT) is applicable to exports, even when they are physically exported to a third party, provided they remain under the temporary importation regime along the way. IMMEX status is also granted to service companies, to perform repairing, cleaning, quality control testing, packing, painting, greasing activities and technological support services (international shared services with certain conditions, back office services). Also, IMMEX entities are able to obtain value-added tax refunds within a 20 working day period, instead of the normal 90 working day period. 2. Import duty drawback Under import duty drawback (devolución de impuestos de importación a los exportadores), all exporters (including indirect exporter suppliers) are entitled to the refund of import duties paid up to one year before on imported merchandise integrated into exported goods or sold to other entities that physically export the related goods. Exporters may also be able to recover import duties through the drawback system when they export products in the same condition in which they were imported. 3. NEEC (Nuevo Esquema de Empresas Certificadas) NEEC is a program that seeks to strengthen the security and facilitate trade of international supply chains operating in Mexico by establishing (along with the private sector) minimum standards on national and international security. • A reduced number of inspections. • Shipment protection. • Reduce time on merchandising crossing. • NEEC importers/exporters are eligible for access to the FAST lanes on Mexican borders with exclusives lanes. • Improvements in the field of security. • Facilities to manage customs: - Reduced time on inspection lines. - Reduce time on importing/exporting processes

28 Tax and Legal Services - PwC Mexico 4. Sectorial Relief Programs (SRP) The SRP benefit companies with preferential import tariff on goods intended for production, regardless of the country of origin. The rates vary from 0 to 5% depending on the type of industry. The authorized industrial sectors in which companies are able to get the above benefit are the following: I. Electricity industry 4 II. Electronic industry III. Furniture industry IV. Toy, recreational games and sporting goods industry V. Footwear industry VI. Mining and metallurgy industry VII. Capital goods industry VIII. Photographic industry IX. Agricultural machinery industry X. Sundry industry XI. Chemical industry XII. Rubber and plastic manufacturing industry XIII. Steel industry XIV. Pharmaceutical, medication and medical equipment industry XV. Transportation industry, except the automobile industrial sector XVI. Paper and cardboard industry XVII. Lumber industry XVIII. Leather and fur industry XIX. Automobile and autoparts industry XX. Textile and apparel industry XXI. Chocolate, sweets and candy industry XXII. Coffee industry XXIII. Food industry 5. Financial assistance Foreign Trade Bank The Foreign Trade Bank (Banco Nacional de Comercio Exterior, ) is the Mexican export development bank and is primarily engaged in all aspects of export support. The bank’s authorized activities include the following. • Providing financial assistance to direct exporters. • Providing loan guarantees. • Providing promotional assistance domestically and overseas. • Providing financial assistance to indirect exporters (those selling to ultimate exporters). • Assisting in the development of export policies and programs. • Acting as fiduciary for trusts and funds engaged in export development activities

Doing Business in Mexico 2015 29 Nacional Financiera, S.N.C. Nafinsa (Nacional Financiera, S.N.C.), a large government-owned development bank, takes an active part in stimulating new industry in Mexico. In this connection it operates a number of services and trust funds that offer assistance, ranging from feasibility studies to direct investment in capital stock and long-term financing. The bank is particularly active in arranging joint ventures of foreign and Mexican investors in companies for the production of capital goods.

Incentives to invest in other countries Mexico offers no incentives, tax or non-tax, to invest in other countries. Additionally, it discourages the investment in tax-favored jurisdictions (i.e. tax havens) by requiring the immediate recognition of undistributed earnings in some cases.

Incentives and foreign investment strategy The current trend of Mexican government policy with regard to incentives is not to grant them except in exceptional cases. With respect to foreign investment, the current trend is toward welcoming it, especially when it contributes to increasing Mexico’s level of employment, exports and technological development.

30 Tax and Legal Services - PwC Mexico Chapter 5 Restrictions on foreign investment and investors

Investor considerations • There are no exchange controls. • Capital and earnings can be freely remitted abroad. • 100% foreign ownership is permitted in a majority of economic 5 activities, including the commercial and services sectors. • Banking industry is almost 100% private and majority foreign ownership of banks is allowed. In addition, NAFTA permits 100% U.S. and Canadian participation in other financial activities, with special requirements. • Private and direct foreign investment at 100% is now permitted in telecommunications and satellite communications. • Regarding the Energy industry, the Secondary Law establishes that exploration and production can now be carried out by contractors (private companies); and other value activities of oil industry such as refining, processing, transportation, storage, distribution and commercialization are now unrestricted and can be conducted under permits and/or authorization.

Doing Business in Mexico 2015 31 Regulatory climate Regulatory authorities The government-owned , Banco de México, is charged with the responsibility of establishing monetary policies and is autonomous from the government. The Foreign Investment Commission (Comisión Nacional de Inversión Extranjera) and its Executive Secretary are responsible for administering the controls on foreign investment and authorizing specific investments, where required. Foreign Investment Commission The Foreign Investment Commission is the central authority that approves foreign investment in new or existing companies where required under the law. The Commission operates through an Executive Secretary and the necessary staff. National Register of Foreign Investment The Foreign Investment Law (Ley de Inversión Extranjera) establishes a National Register of Foreign Investment (Registro Nacional de Inversiones Extranjeras), which is maintained by the Ministry of Economy (Secretaría de Economía “SE”). Under the applicable provisions, the following information must be included in the Register: • Mexican companies with foreign shareholders. • Foreign individuals or legal entities that regularly carry out acts of commerce in Mexico, and branches of foreign investors or entities established in Mexico, • Trusts owning shares (or other equity) of Mexican companies or real estate in Mexico, and “neutral” investment trusts with foreign beneficiaries. When SE is provided with the necessary information, it will issue the corresponding registration certificate, which must be renewed on an annual basis. For this purpose, it is necessary to complete and submit an economic-financial questionnaire. The parties referred to in the first and second categories above and the trustees of the trusts referred to in the third category above are responsible for registering with SE within 40 business days following the occurrence of any of the following: • Incorporation of the corresponding company. • Participation of the foreign investment in and the formalization or notarization of the documents relative to Mexican branches of foreign companies, or • Formation of a trust or the granting of trust rights to foreign investors as set forth above. Regulatory legislation The Foreign Investment Law reserves certain activities to the Mexican government or to Mexican nationals, and limits foreign ownership to a specified maximum minority percentage of Mexican company shares in certain cases, as detailed at the end of this Chapter.

32 Tax and Legal Services - PwC Mexico Liberalization of foreign investment restrictions Over the last three decades, the rules governing foreign investment in Mexico, once somewhat restrictive, have been substantially liberalized. In line with the signing of the free-trade agreement with the United States and Canada and the general opening of the Mexican economy, a new foreign investment law was published in December 1993.Under this legislation, the rules governing foreign investment were further liberalized, especially in the following areas: • Elimination of the requirement to secure prior authorization to exceed 49% ownership 5 in most areas, except those specifically restricted by the Constitution or specific legislation. • Elimination of certain commitments or performance requirements, such as the need to maintain a positive balance of foreign exchange, the requirement to make additional investments in fixed assets or export a certain volume of products. Fast track approval The Foreign Investment Law and its regulations provide expeditious application processing procedures by requiring that an application for authorization by the Foreign Investment Commission must be approved or rejected within 45 business days after it is filed. If no reply is received within this period, the application will be considered as automatically approved. Penalties and foreign investment Violations of the Foreign Investment Law and its regulations are penalized with fines ranging from 30 to 5,000 times the general minimum salary in effect in Mexico City at the time the violation takes place. In cases of violations relating to the use of real estate in the restricted zones, the fine could be up to the amount of the transaction involved. In certain cases the SE is empowered to declare null and void any transaction made in violation of the foreign investment law. In the case of fines, the authorities take into consideration the nature of the violation, the economic capacity of the offender, the time elapsed between the time when the obligation should have been satisfied and the time of compliance or regularization and the total value of the transaction.

Exchange controls The is freely convertible into all other currencies, and there are no restrictions on the remittance of profits abroad or the repatriation of capital. Foreign currency liabilities payable in Mexico Obligations specified in foreign currency but payable within Mexico, whether contracted in a foreign country or in Mexico, may be repaid in pesos at the exchange rate published by the bank of Mexico in the Official Federal Gazette on the day preceding the date of payment. Registration of foreign capital There are no requirements for registering direct investment in Mexico when made with foreign currency. Accordingly, no proof of registration or of having brought foreign currency to Mexico is necessary at the time of purchasing foreign currency with pesos for repatriation purposes.

Doing Business in Mexico 2015 33 Currency accounts No special currency accounts are required for foreign investors or traders. Repatriation of capital and earnings There are no exchange control limitations on remittances in foreign currency for repatriation of capital investments and repayments of intercompany loans or for remittance of dividends, intercompany interest or branch profits. However, all corporations are required to set aside from their profits a legal reserve amounting to 5% of yearly earnings until an amount equal to 20% of the capital stock of the entity is reached. Foreign currency for remittances of royalties and technical assistance fees, as well as for payments of imported merchandise, may be freely obtained in the exchange market. Guarantees against inconvertibility There are no guarantees against inconvertibility, and all transactions in the exchange market depend on the availability of foreign currency funds.

Restrictions on foreign investment Definition of foreign investment The following activities are considered as foreign investment for purposes of the foreign investment law: • Participation by foreign investors, in any percentage, in the capital stock of Mexican companies. • Investments by Mexican companies in which foreign investors have a majority interest and, • Participation by foreign investors in activities and acts described in the foreign investment law. This law provides that foreign individuals residing in Mexico with the status of permanent immigrants (inmigrados) will be considered domestic investors for purposes of this law, except in regard to those activities reserved to or to Mexican companies that prohibit ownership of shares by foreigners, or in the cases of investments involving ownership of residential real estate in the border or coastal areas. Industries closed to private enterprise and foreign investors In accordance with the Foreign Investment Law, foreign investors may, as a general rule, invest in Mexico without any prior authorization or restriction, except as provided in law. Specifically, the law establishes that foreign investors may do the following: • Participate in any proportion in the capital stock of Mexican companies. • Acquire fixed assets. • Participate in new fields of economic activity or manufacture new product lines and, Open, operate, expand, and relocate existing establishments, except in the case described in this chapter.

34 Tax and Legal Services - PwC Mexico In general, there are five categories of restrictions, as follows: Category 1—Activities exclusively reserved to the Mexican state: I. Exploration and extraction of oil and hydrocarbons. II. Planning and control of the National Electricity System as well as Electricity transmission and distribution; III. Nuclear power generation; IV. Radioactive minerals; V. Telegraph; VI. Radiotelegraphy; 5 VII. Postal service; VIII. Bank note issuing; IX. Minting of ; X. Control, supervision and surveillance of ports, airports and heliports XI. Any other activity set forth expressly by applicable legal provisions. Category 2—Activities exclusively reserved to Mexican nationals and to Mexican companies in which foreign investment cannot participate: I. Land domestic passenger, tourism and freight transport, without including courier or packaging services. II. Development banks, under the terms of the law governing these entities; and III. Rendering of certain professional and technical services reserved expressly by applicable legal provisions. Foreign investment may not participate directly in the activities and companies mentioned or through trusts, contracts, partnerships or by-law agreements, pyramiding schemes, or other mechanisms granting any control or participation. Foreign investment may not participate directly in the activities and companies mentioned or through trusts, contracts, partnerships or by-law agreements, pyramiding schemes, or other mechanisms granting any control or participation. Category 3—Activities in which foreign investment is limited to specified percentages, ranging from 10 to 49%: I. Up to 10% uncooperative companies for production; II. Up to 25% in: a. Domestic air transportation; b. Air taxi transportation; and c. Specialized air transportation; III. Up to 49% in: a. Manufacture and commercialization of explosives, firearms, cartridges, ammunitions and fireworks, not including acquisition and use of explosives for industrial and extraction activities nor the preparation of explosive compounds for use in said activities; b. Printing and publication of newspapers for circulation solely throughout Mexico; c. Series “T” shares in companies owning agricultural, ranching, and forestry land; d. Fresh water, coastal, and exclusive economic zone fishing, not including fisheries; e. Integral port administration; f. Port pilot services for inland navigation under the terms of the law governing this activity;

Doing Business in Mexico 2015 35 g) Shipping companies engaged in commercial exploitation of ships for inland and coastal navigation, excluding tourism cruises and exploitation of marine dredges and devices for port construction, conservation and port operation; h) Supply of fuel and lubricants for ships, airplanes, and railway equipment; and i) Radio broadcasting. This percentage of foreign investment will be subject to reciprocity rules that may exist with the country where the investor is incorporated, or the economic agent that controls the investor in last instance either directly or indirectly. j) Telecommunications concessionaire companies as provided by Articles 11 and 12 of the Federal Telecommunications Law; Foreign investment participation limits in the activities and companies mentioned above may not be exceeded directly or through trusts, contracts, partnerships or by-law agreements, pyramiding schemes or other mechanisms granting any control or a higher participation in excess of the established limit. Category 4—Activities requiring permission to have more than 49% foreign participation: I. Port services allowing ships to conduct inland navigation operations, such as towing, mooring and barging. II. Shipping companies engaged in the exploitation of ships solely for high-seas traffic, except those shipping companies engaged to perform services for the exploration and extraction of oil and hydrocarbons.; III. Concessionaire or permissionaire companies of air fields for public service; IV. Private education services of pre-school, elementary, middle school, high school, college or any combination; V. Legal services; VI. Construction of pipelines for the transportation of petroleum and products derived therefrom; VII. Oil and gas well drilling; and VIII. Construction, operation and exploitation of general railways and public services of railway transportation. Category 5—A favorable resolution from the Foreign Investment Commission is required for foreign investment to participate, directly or indirectly, in a percentage higher than 49% of the capital stock of Mexican companies when the aggregate value of the assets of such companies at the date of acquisition exceeds the amount determined annually by the Commission.

36 Tax and Legal Services - PwC Mexico Real estate in restricted zones The foreign investment law provides that Mexican companies with majority foreign investment may directly acquire real estate located within the restricted zones without the need of having a trust, as long as such real estate is not intended to be used for residential purposes, but rather for industrial, commercial and/or tourism activities in general, and provided the acquisition is registered with the Ministry of Foreign Affairs (Secretaría de Relaciones Exteriores) within the 60 natural days following after the day the acquisition took place. The acquisition by foreigners or Mexican companies with foreign owners of residential 5 real estate located within the restricted zones must be handled through a trust subject to the following rules: • A permit is required from the Ministry of Foreign Affairs for Mexican banks to acquire, as trustees, real estate in the restricted zones. • The beneficiaries of the trust can be Mexican companies with foreign owners, including individuals or entities, or foreign entities and individuals. • The trusts have a maximum duration of 50 years, renewable at the request of the interested party. In the case of such request, the Ministry of Foreign Affairs reserves the right to verify compliance with the conditions under which the trust was authorized or registered. • The Ministry of Foreign Affairs has the right to decide whether it will grant permission to form the trust, taking into consideration the economic and social benefits that the trust in question may bring to Mexico. • All applications to form trusts submitted to the Ministry of Foreign Affairs must be acted on by the Ministry within the following 5 business days, after their filing with the central administrative applicable unit, or within the 30 business days following the filing date of the application, if same are to be filed before the state delegations of such authority. If the authority does not respond within the above mentioned 30-day period, the application will be considered to be approved. Branches of foreign companies Foreign companies wishing to engage in commercial activities in Mexico on a regular basis, where no foreign investment restrictions apply, must obtain prior authorization from the SE to establish and register a Mexican branch in the Public Register of Commerce (Registro Público de la Propiedad y del Comercio). Proper applications filed with the Ministry are required to be granted within 15 business days following their filing date. In addition, due to recent treaties executed by the Mexican Government,, companies from the Unites States, Canada, Chile, Costa Rica, Colombia, Nicaragua, El Salvador, Guatemala, Honduras, Uruguay, Japan and do not require authorization from the SE to establish and register a Mexican branch in Mexico.

Doing Business in Mexico 2015 37 Neutral investment In order to allow the participation of foreign investment in those activities which, in principle, are exclusively reserved to Mexican nationals or to Mexican companies in which foreign investment is not allowed, the foreign investment law permits a “neutral investment,” which is defined as an investment made in Mexican companies or in authorized trusts and which does not represent a percentage of foreign investment in the capital stock of Mexican companies.

Neutral investment instruments SE may authorize Mexican banking institutions (trustees) to issue neutral investment instruments, such as participation certificates, which will confer on the holder only certain economic rights. These instruments must also have limited voting rights in Mexican companies, i.e., the neutral instrument cannot provide the right to vote in the ordinary general stockholders’ meetings of Mexican companies.

Neutral investment represented by special series of shares The Foreign Investment Law considers an investment to be neutral when the foreign investment is made in non-voting shares or in shares with limited voting rights issued with SE’s prior authorization. In the cases of companies whose shares are publicly traded, permission is required from the Mexican Banking and Securities Exchange Commission (Comisión Nacional Bancaria y de Valores). Neutral investments by international financial development companies The Foreign Investment Commission may authorize neutral investments that international financial development companies intend to make in the capital stock of Mexican companies, in accordance with the terms and conditions to be set forth in its regulations. Maquiladoras The policy of allowing the establishment of wholly owned maquiladoras (in-bond processing companies), now IMMEX companies, by foreign investors without prior authorization and under virtually no restrictions, is continued and is extended to certain other export-oriented activities. Joint venture agreements Joint venture agreements or contracts (Asociación en Participación—A. en P.), as opposed to joint venture corporations, are not subject to the restrictions or requirements as regards percentage of ownership, registration, etc., since they do not constitute separate entities but instead are considered to be the activities of the managing joint venturer (asociante). However, some attorneys are of the opinion that if an A. en P. agreement results in a foreign participation of more than 49% of the total profits of the venture or if the foreigners have the right to manage or control its general activities, then the A. en P. agreement should be submitted for approval or, at a minimum, the Foreign Investment Commission should be informed of its contents. Given the flexibility and ease of entering into A. en P. agreements, their use has been somewhat common for short-term ventures. For details on the characteristics and tax treatment of joint venture agreements under Mexican law, refer to the relevant sections of Chapters 9 and 19.

38 Tax and Legal Services - PwC Mexico Other restrictions Depending on the potential investor’s activity and desired location, other restrictions beyond the scope of this Guide may apply. Accordingly, competent counsel should always be sought during the planning stage for any investment. Bilateral investment treaties Mexico has signed agreements with several countries to protect and promote investments of their investors in Mexico and vice versa. These agreements have been signed with Argentina, , Australia, Belarus, Belgium, the Czech Republic, , , , Finland, France, Germany, Greece, Iceland, , Italy, Korea, 5 Luxemburg, the Netherlands, Panama, , Slovakia, Spain, , Switzerland, Trinidad & Tobago, the United Kingdom and Uruguay. Mexico has entered into free-trade agreements with the United States and Canada (NAFTA), Guatemala, El Salvador and Honduras, Iceland, Norway, Liechtenstein and Switzerland (EFTA), Colombia (G2), Bolivia, Costa Rica, Chile, Israel, Nicaragua, Uruguay, Japan and the European Union. Some of these agreements also refer to investments between the signing countries, requiring non-discriminatory practices and most favorable nation treatment.

Policy trends Effect on foreign investment The traditional trend in Mexico is definitely toward the acceptance of new foreign investment. This attitude is evident in the foreign investment law issued in 1993 and the expected upcoming reforms. In any event, the foreign business executive considering Doing Business in Mexico will be in a better position to secure approval, if required, if the proposal involves exporting goods or services from Mexico, providing employment opportunities and developing or improving local technology. Additionally, the location of plant sites in development areas and the degree of ecological protection offered would also be considered in an application.

Doing Business in Mexico 2015 39 40 Tax and Legal Services - PwC Mexico Chapter 6 Regulatory environment

Investor considerations • Mexican Government trend is toward deregulation in the foreign investment, foreign trade, telecommunications and energy sectors and toward stricter regulation in ecological protection, urban development, consumer protection, governmental transparency and intellectual property rights. 6 • Monopolies viewed as in the national interest still exist in the petroleum sector and in the postal services. • Patent protection is available for a non-extendable term of 20 years. • Trademark protection is available for a ten-year period, renewable every 10 years. • Copyright piracy is severely punished through criminal prosecution. • Private and direct foreign investment at 100% is now permitted in telecommunications and satellite communications. • Regarding the Energy industry, the Reform authorizes the Federal Government to execute exploration and production activities by means of granting assignments to State Owned Productive Companies or through contracts executed with private companies. Also, the Secondary Law allows the participation of private companies in activities such as refining, transportation, and storage.

Doing Business in Mexico 2015 41 Regulation of business The regulation of business enterprises is distributed among a number of government agencies operating under various cabinet ministries, the more important of which are referred to below. The states do not have the authority to incorporate corporations. In some cases where foreign investment is involved, approval is granted only after authorization by the Foreign Investment Commission, a part of the Ministry of Economy (SE) as described in Chapter 5.

Competition Policy The antitrust law (Ley Federal de Competencia Económica or Federal Law of Economic Competition) prohibits monopolies, monopolistic activities and unlawful business concentrations. One of its main objectives is preventing such monopolistic activities as price-fixing, selective distribution, anticompetitive concerted practices and the elimination of competition. Severe penalties are imposed on violations. A Federal Competition Commission (Comisión) imposes penalties or conditions or subjects “concentrations” to total or partial divestiture. Its mission is to protect the process of competition and market access by eliminating monopolies, monopolistic practices and other restrictions on the efficient functioning of markets. This legislation is consistent with U.S., Canadian and European antitrust principles.

Price controls Article 28 of the Political Constitution of the United Mexican States (Constitución Política de los Estados Unidos Mexicanos) provides that Mexican Laws will establish the basis for fixing maximum prices for items, materials or products considered as necessary either for the economy or for popular consumption. The law shall protect consumers and legally organize them to take better care of their interests. The Federal Law of Economic Competition sets forth the rules for determining prices for products and services necessary for the economy or for popular consumption in terms of said Article 28. A considerable number of products are still subject to what is considered variable price “controls”. These include basic petrochemicals, certain chemical products for industrial use and the products of a number of basic industries, including, among others, cellulose and fertilizers. The prices of these products may be varied upon authorization of the SE or the Ministry of Energy. Pharmaceutical products All pharmaceutical products must be authorized by the Ministry of Health (Secretaría de Salud) for their production, import and sale. Maximum selling prices must also be approved by the SE. Such prices have, in most cases, allowed for reasonable profit margins on products sold in what is considered the private market and to a lesser degree on the products included in the basic list of medicines for the public sector. A third and preponderant market for generic products for the lowest income groups is supplied at the lowest possible prices.

42 Tax and Legal Services - PwC Mexico The Mexican Government is interested in promoting the consolidation of companies in the industry, with a view to increasing the participation of Mexican investors and reducing costs, for both export and local market purposes. Increased production of raw materials for the industry is also desired. It is recommended to seek the advice of a competent specialist when considering a possible investment.

Mergers and acquisitions In the past, many foreign investors in Mexico preferred to purchase an interest in an established local concern rather than to form a new company that might enter the market at a competitive disadvantage. In any event, it is advisable to contact our Legal Area for competent legal advice when considering an acquisition or a merger. For a 6 discussion of the tax consequences of mergers and acquisitions, see Chapter 17.

Securities markets (stock exchange) Public offerings of securities, the stock exchange, brokers, and dealers are regulated under the Securities Market Law (SML), which governs the operations of the National Securities Commission. Only securities approved by the Securities Commission and included in its National Register of Securities and Intermediaries may be offered to the public. The Securities Market Law was enacted on June 28, 2006. This new securities market legislation establishes regulations in accordance with modern international standards governing the fundamental principles of the securities market. Among other objectives, the new law aims to incorporate medium-size corporations in the securities market, establishes minority shareholders’ rights and corporate governance standards, as well as the regulation of the conduct of the participants in the securities market, with the final purpose of reducing the cost for the issuer.

Requirements for Securities Commission approval In addition to details and documentation of the organization of a company, information as to its officers and a description of its business, a company desiring to have its equity or debt securities approved by the Securities Commission is required to furnish to the Commission, among other documentation, audited financial statements. Final approval can be expected to take from one to four months under normal conditions. Subsequently, audited annual financial statements must be published and furnished to the Commission.

Mexican Stock Exchange The Mexican Stock Exchange is operated by a corporation whose shareholders used to be the brokers and broker-dealers registered to do business through the Mexican Stock Exchange, but which went public in 2008. The principal requirement for listing a company’s securities is the prior approval of the Securities Commission. Each listed company is required to provide annual audited financial statements as well as unaudited interim statements on a quarterly basis. No special rules exist for a foreign acquisition of an interest in a local publicly held enterprise, other than the restrictions that may still apply with respect to corporations engaged in certain activities where foreign ownership is limited or not permitted. See Chapter 5 for details.

Doing Business in Mexico 2015 43 Brokers and broker-dealers The Securities Market Law establishes stringent rules for companies acting as broker- dealers and for individual securities brokers, who may not act as dealers or own shares in the companies registered as broker-dealers. Broker-dealers must be Mexican corporations whose shares may not be owned by individual registered brokers, foreigners who are not permanent immigrants or corporations other than Mexican banks and finance companies. The managers and officials of such corporations who deal with the public must be registered brokers. All brokers and broker-dealers must be registered with the National Register of Securities and Intermediaries maintained by the Securities Commission.

Imports and exports In the 1990´s Mexico liberalized most import restrictions previously existing and considered internationally as trade restrictions. These actions included significant reductions of import duties and elimination of prior import permits for most merchandise listed in the General Import Duty Tariffs. With respect to exports, Mexico has made significant efforts to encourage companies to export manufactured goods by developing certain Government programs, including temporary duty-free imports to be integrated into exported goods, financing programs and simplifications of official export procedures. Trade agreements are in effect with the United States and Canada (NAFTA), the European Union, EFTA countries (Switzerland, Iceland, Liechtenstein and Norway), Colombia, Guatemala, Honduras and El Salvador, Nicaragua, Costa Rica, Chile, Bolivia, Uruguay, Israel and Japan. Mexico is a member of the World Trade Organization (WTO) and, as such, is streamlining or eliminating trade barriers.

Consumer protection All entities (including state-owned corporations) and individuals that manufacture, distribute or sell goods or render services are subject to the Federal Consumer Protection Law. This law was passed to provide consumers with adequate protection against merchants and service providers that do not comply with the minimum standards or specifications for products and services, including e-business. SE is empowered to impose fines and use other coercive measures to protect the consumer.

Data Protection Data protection acquired relevance in Mexico in 2009, a constitutional guarantee grants every person the right to the protection, access, rectification, blocking, erasure and destruction of personal data, as well as to opposition to its treatment in the terms stated in the Law. Infringements to the Law will be punished by IFAI (Federal Institute for Access to Information and Data Protection) with fines from 100 to 320,000 days of the General Current Minimum Wage in Mexico. Regarding infringements committed in processing sensitive personal data, sanctions may be doubled.

44 Tax and Legal Services - PwC Mexico IFAI will ground its decisions in law and fact, considering: • The nature of the personal data concerned, • The evident inappropriate refusal of the data controller to perform the actions requested by the data subject, • The intentional or unintentional nature of the action or omission constituting the infringement, • The financial capacity of the data controller, • Recurrence Regarding crimes relating to unlawful processing of Personal Data: Three months to three years imprisonment, to any person who authorized to process 6 personal data, for profit, causes a security breach affecting the databases under his custody. Six months to five years imprisonment, to any person who, with the aim of achieving unlawful profit, processes personal data deceitfully, taking advantage of an error of the data subject or the person authorized to transmit such data. Some of the general obligations to comply with on this subject matter are as follows: • To appoint a Data Protection Officer. • To create an inventory of the personal data collected by the entity (Data Controller) • To elaborate matrices of personal data processing occurring throughout the entity. • To make readily available fair collection/privacy statements (considering the different purposes) to Data Subjects. • To formalize the process to attend Subject Access Requests and the exercise of other Data Subject’s rights such as rectification, blocking, erasure and destruction of his personal data (in Mexico referred as ARCO rights) • To insert privacy clauses in contracts. • To implement a privacy policy and the necessary proceedings and resources to enforce it. • To enable technical and organizational measures to prevent unauthorized or unlawful processing of personal data. • To develop business continuity and disaster recovery plans. • To promote data protection and privacy culture among employees (Training).

Doing Business in Mexico 2015 45 Imports In the case of imports, SE requires the importer to re-label the products to include, in Spanish, the relevant information about the contents of the product, name and country of origin of the producer, and information about the importer, port of entry, etc. Additionally, all imported merchandise should meet minimum sanitary and safety standards Finally, a wide variety of products must comply with the Mexican Standards of Quality, referred to as Mexican Official Norms (NOM). The regulations applicable to labels contemplate that the minimum required information to be included on the labels is as follows: • Description of the goods. • Importer’s name and address. • Warnings or precautionary information in the case of hazardous products. • Instructions for use and storage. • Expiration date (if applicable). Also, certain imports and exports are subject to regulations by the Ministry of the Environment and Natural Resources (SEMARNAT). Some imported products must receive sanitary or phytosanitary authorizations issued by the Ministry of Health (MH). There are also rules establishing the classification of goods whose importation is subject to regulation by the Commission for the Control of Pesticides, Fertilizers and Toxic Substances.

Food and drugs In accordance with the General Law on Health and numerous specific regulatory decrees, all types of prepared or packaged foods, meat, beverages, medicines and related products must be approved and registered with the MH, which is authorized to make continuing follow-up inspections and laboratory tests at its discretion. Products of the types requiring approval and registration may not be imported unless they were previously registered with the MH. In some cases imports require specific authorization.

Environmental provisions For many years, the Mexican government, through various ministries, exercised authority to control certain types of industrial pollution, now through SEMARNAT. The General Law of Ecological Balance and Environmental Protection, which was amended in 2006, provides for the imposition of substantial fines and even closure of the offending establishment in the event of non-compliance with the applicable rules and regulations. The law and regulations have been enforced on a broad scale by the National Institute of Ecology (INE) and by the Federal Public Attorney’s Office for the Protection of the Environment (PROFEPA), both units of SEMARNAT. The Criminal Code introduced a chapter that regulates Environmental Crimes; the punishment for this type of crimes goes from six months to 10 years of imprisonment, plus a substantial fine. Furthermore, local and state environmental legislation exists, including in the Federal District. Although very similar, they regulate activities not contemplated under the Federal law.

46 Tax and Legal Services - PwC Mexico Electronic Contracting: Private use and public trend; online consumer protection In general, electronic contracts and web contracts are valid in Mexico under the Commercial Code and the Federal Civil Code. Furthermore, legislation on advanced electronic signatures for commercial transactions are in place since 2003. While Civil and Commercial Courts are obliged to acknowledge the validity of electronic evidence, certain Courts (e.g. labour Courts) are not specifically forced to accept such evidence; it should be noted also that certain documents must be presented in hard copy and with handwritten signatures in order to be valid in court (i.e. promissory notes). On the other hand, electronic signatures and advanced electronic signatures are widely 6 used at government level. There is a clear trend toward using electronic signatures both in government-to- government communications and government-citizen communications (such as public bids, foreign investment reporting obligations, tax reporting/payment obligations, among others). Public Administration expects these technologies to improve government transparency, efficiency and accountability. The Consumer Protection Law offers considerable protection to online consumers (including advertising and data processing rules, through minority or vulnerable protection rights, among others).

Special industries Special regulations govern the operation of certain industries, some of which have already been covered. Others are discussed below. However, this section discusses these restrictions only in broad terms. Accordingly, those interested in more specific information about a certain industry or activity should consult with our advisers.

Insurance and banking The foreign investment law authorizes foreign ownership of insurance companies. The National Insurance and Bonding Commission regulate insurance activity in Mexico. Where the insured asset is situated in Mexico, the law provides that all insurance must be written with insurance companies authorized to do business in Mexico. Any person involved in the placing of insurance with companies not so authorized (entries in the Mexican company’s books, among other things, being deemed to be involvement) is liable to criminal prosecution. Similar provisions exist with respect to fidelity and other types of bonds. It should be noted; however, that substantial deregulation of both the banking and the insurance industries has been accomplished during recent administrations.

Doing Business in Mexico 2015 47 Mining industry Subsoil and mineral rights In accordance with the Mexican Constitution, the subsoil and any minerals found therein are the inalienable property of the nation. All mining activity requires a concession from the federal government. The mining law establishes the following: • Foreign ownership of Mexican corporations must conform to the restrictions imposed by the foreign investment law and is not specifically restricted by this law. • Exploration concessions will be granted for a non-renewable six-year period. • Exploitation concessions will be granted for a 50-year period, which can be extended for an additional 50 years. • Concessions will not be granted within areas that have been incorporated into the National Mining Reserves. All concessions in connection with mining activities do not include permission for exploration and extraction of oil and hydrocarbons, nor transmission and distribution of electricit. Labor matters Labor unions are usually quite strong in the mining industry, and the corresponding collective labor contracts tend to grant fringe benefits more substantial than the minimums required by the Federal Labor Law. Most mining labor contracts provide for substantial severance compensation upon voluntary retirement after a specified number of years. Mining companies (as all entities) are required to provide social security to their employees; however, if no public health services are available in the area where the mine is located, the mining entity will have to finance (and provide) medical services on its own. Telecomm industry Mexico’s Telecommunications reform represents a bold and aggressive step to remove barriers to competition, to improve the delivery of key services, and enhance the opportunity for innovation and productivity gains. Direct foreign investment in telecommunications and satellite communications goes to 100% and radio broadcasting, in which foreign investment formerly was prohibited, goes up to 49%, subject to a requirement of reciprocity and potentially allowing for additional participation through limited voting rights. This opportunity could represent an unprecedented possibility for foreign investment to participate in Mexico, beyond the opportunities to invest in existing entities; the reform opens the door to market consolidations and access to non-Mexican financial resources for network and service expansion. Energy industry The Mexican Congress approved amendments and additions to the Constitution in matter of energy. Hydrocarbons in the subsoil will continue to be property of the Nation and investors may take part in the following activities: • Exploration and extraction of oil and gas (hydrocarbons). • Refining, gas processing, transportation, storage and distribution. • Generation of electricity under permit. Investors will have more opportunities to participate actively in the hydrocarbons and electric sector.

48 Tax and Legal Services - PwC Mexico In the case of Oil & Gas and refining, gas processing, transportation, storage and distribution, there are specific regulations, relating to permanent establishments, depreciation rates, among others, which should be closely evaluated for tax purposes.

Patents and trademarks Industrial property is regulated by the Industry Property Law enacted in June 1991. This law regulates, among others things, patents, trademarks, industrial designs, licenses, slogans, franchises, etc. It is not necessary to submit for prior approval and registration contracts for the use of patents, trademarks or trade names or for providing technical assistance or know-how. However, for due protection of patents, trademarks and copyrights, license agreements for these should be registered with the proper Mexican Authorities, particularly to ensure their enforceability vis-a-vis third parties.

Patents In general, patents are issued for a non-extendable term of 20 years from date of issue, considering that the legal date of the patent will be the date on which the application was filed. Holders of Mexican patents are required to commence exploitation of their patents within three years after they are issued, except when the holder of the patent has been importing the patented product or a product obtained through the use of a patented process. Otherwise, unless technical or financial just cause can be proven; an obligatory non-exclusive license to use the patent may be authorized by the Mexican Institute of Industrial Property upon request. In this case, the amount of royalties payable and other terms for such a license will be specified by the authorities. This license will expire if two years have elapsed since it was granted and the holder does not exploit it or prove reasonable cause for not exploiting it.

Trademarks Under the law, trademarks may be registered for a period of ten years, renewable every ten years. Proof of actual use of a trademark within at least three years after it was registered must be furnished to the Mexican Institute of Industrial Property, or the registration will be considered to have lapsed. Our Corporate Legal Area can be contacted for competent legal advice in any situation dealing with the protection, licensing or sale of intellectual property rights.

Copyright protection against video and audio piracy In order to protect authors or owners of exclusive rights to software programs, video and audio recordings, books and other intellectual or artistic properties, registration of these properties with the National Copyright Institute (Instituto Nacional del Derecho de Autor) must be made in Mexico. The protection of Copyrights lasts during the life of the author and 100 years after his death. To exploit them commercially, those reproducing or exploiting the copyrighted material must demonstrate their legal right to do so, and the reproductions themselves should clearly state the entity’s corresponding authorization through a copyright license. Piracy of these restricted-use properties duly registered in Mexico is severely punished through criminal prosecution and confiscation of both the unauthorized copies and the equipment used to carry out this activity.

Doing Business in Mexico 2015 49 50 Tax and Legal Services - PwC Mexico Chapter 7 Banking and finance

Investor’s considerations • Local credit has increased and diversified in recent years. • Commercial credit provided by banks for long-term loans, credit cards and real estate mortgage loans, as well as for financing inventories and receivables, have grown substantially. • Brokerage houses have a significant participation in the financial markets. • Banco de México, the central bank, operates as an autonomous 7 entity within the federal government, including autonomy in issues. • The Mexican Derivatives Market (Mercado Mexicano de Derivados—MexDer) has been in place since 1998. • The Securities Market Law (Ley de Mercado de Valores) has been in force since June 2006. • New niche banks and financial entities have been participating in the local credit market. • 6 new banks have been incorporated in 2013, taking the total number of financial institutions to 47. And, at least another three new financial institutions are expected to be added in 2014. • In Jan 2014, the Financial Services Reform was published with amendments to more than 30 statutes, including the issuance of a new Financial Group Law (Ley para Regular a las Agrupaciones Financieras). • The changes seek to strengthen the country’s banking and securities legal environment to increase competition and lower the cost of borrowing and banking services.

Doing Business in Mexico 2015 51 General note The Mexican banking system is privately owned and managed. Foreign investment is fully allowed. In order to reduce the risk of a banking crisis and to protect investors’ savings in financial institutions, the Banking Savings Protection Law (Ley de Protección al Ahorro Bancario) has been in place to help resolve the banking system bad debt problem, while protecting depositors. There are commissions that supervise and regulate the different segments of the financial sector. These commissions (agencies of the Ministry of Finance) Secretaria de Hacienda y Credito Público (SHCP), include: The National Banking and Securities Commission (Comisión Nacional Bancaria y de Valores-CNBV), the National Commission for Retirement Savings Systems (Comisión Nacional de los Sistemas de Ahorro para el Retiro-CONSAR),the National Insurance and Bonding Commission (Comisión Nacional de Seguros y Fianzas-CNSF) and the National Commission for the Protection and Defence of Users of the Financial System (Comisión Nacional para la Proteccion y Defensa de los Usuarios de Servicios Financieros-CONDUSEF), as well as the Institute for the Protection of Savings (Instituto para la Protección al Ahorro Bancario – IPAB).

Banking system Central bank The Mexican banking system is regulated by The Central Bank (Banco de México), which is operationally autonomous in setting monetary policy. The Central Bank is in charge of supervising the operation of the Mexican banking system in order to have an efficient payment system. The National Banking and Securities Commission is a government commission under the Ministry of Finance. Its main activities are to supervise and to regulate financial entities in order to maintain stability and good performance and to protect companies’ and individuals’ interests. It has the authority to penalize financial institutions when they violate provisions of the laws regulating their activities. The Commission has adjusted accounting standards for banks, stock brokerage firms and other intermediaries in order to match internationally accepted accounting principles and standards. Banking market The banks are divided into three groups: development banks, commercial banks and niche banks.

Development banks The development banks include those established by the government to develop specific industries based on the National Development Plan (Plan Nacional de Desarrollo), such as the export trade. Currently, there are seven development banks: Nacional Financiera - Focused on the development of small and medium-size businesses through financing, training and technical assistance. Banco Nacional del Ejército - Its main activity is to provide banking services to the military population and to support the Federal Government.

52 Tax and Legal Services - PwC Mexico Bancomext - Focused on encouraging Mexican companies, namely small and medium sized firms, to trade in global markets by providing financing, training and technical assistance to drive foreign trade, promote regional growth and create jobs. Banco Nacional de Obras y Servicios Públicos - Its function is to finance or refinance public or private projects focused on public services. Banco de Ahorro Nacional y Servicios Financieros- Focused on providing financial opportunities to all the population, especially to low-income sectors. Sociedad Hipotecaria Federal - Promotes the construction of houses for low-income sectors and provides mortgages. Financiera Rural - Focused on providing financial resources, technical assistance, training and consulting to the rural sector. 7 Commercial banks Commercial banks receive the majority of checking and savings deposits and provide most of the short-term credit. The largest banks (Banamex – owned by , BBVA-Bancomer, Santander, , HSBC and ) operate throughout the country. Commercial banks also provide long-term loans for capital goods and real estate mortgage loans, as well as for financing inventories and receivables. Individuals and companies resident in border zones are authorized to maintain checking accounts denominated in U.S. currency.

Niche banks (Bancos de nicho) In February 2008, the Mexican Congress enacted several reforms to the banking law to allow the creation of “niche banks” within the banking system. Niche banks undertake limited operations without the burden of carrying out the whole set of operations covered by the banking law. With these modifications, for instance, it would be possible to have institutions focused only on trading or trust activities without performing credit activities. Bank reserves In 1999 the Bank Savings Protection Law was promulgated. The objective of this law is to protect the population’s savings. For this purpose, commercial banks are obligated to pay 0.04% of the total amount of their liability operations annually to the Bank Savings Protection Institute (IPAB). The percentage of its credit operation reserves is determined based on the client credit scores of each particular bank. Investment availability The Ministry of Finance authorizes private and public companies to issue both private and public debt instruments placed with the general investing public through the Mexican Stock Exchange, which provide interest rates or discounts yielding higher returns to investors than returns offered by commercial banks. Additionally, exchange coverage protection may be purchased, and peso futures are currently traded on the Chicago Mercantile Exchange, the Chicago Board of Options Exchange and the Mexican Derivatives Market (MexDer).

Doing Business in Mexico 2015 53 Specialized financial institutions Financial holding companies are usually formed to hold interests in banking, stock brokerage, insurance, bonding, financial leasing, and factoring companies. Separate legislation regulates each of these activities, including holding companies.

Non-Bank financial entities An entity called Sociedad Financiera de Objeto Multiple or SOFOM was created as a result of amendments to certain mercantile laws. These entities are basically devoted to providing financing through direct loans, financial leasing and factoring, and do not need to obtain an authorization from the Ministry of Finance to carry out business operations. However, they are not allowed to obtain funds (deposits) from the general public. There are two types of SOFOMs: a. Regulated SOFOMs: According to the Financial Reform, any SOFOM with patrimonial links to a Credit Institution, Popular Financial Corporations, Financial Community Corporations (Levels I to IV), Cooperatives Savings and Loan (Levels I to IV) and those debt securities issued by their dependents and enrolled in the National Registry of Securities, will be considered as regulated. In order to be a Regulated SOFOM it is necessary that a Mexican financial group holding company that owns a bank participate in the capital stock of the SOFOM. Also, a SOFOM would be a regulated SOFOM if either its capital stock is owned 20% or more by a bank or if the bank effectively controls the SOFOM by any means, or if the SOFOM and a bank have common shareholders, or if a financial group holding company directly or indirectly holds 51% or more of both a SOFOM as a credit institution or if the company has shareholders or members in common with any of the companies mentioned above and owns 50% of the two companies or controls the assembly or board of both companies. These types of entities are regulated by the Banking Commission. b. Non-Regulated SOFOMs are those that do not have any capital link with a financial entity regulated in Mexico or a relation as mentioned before. As part of the Financial Reform, both types must be registered with CONDUSEF to be considered as a SOFOM and must also be users of a credit bureau. SOFOMs are considered part of the Mexican financial system for tax purposes and are subject to the same tax treatment, providing that (i) at least seventy percent (70%) of its assets derive from portfolio or accounts receivable resulting from the main corporate purposes of the SOFOM (i.e. credit, factoring or financial leasing), or (ii) that the company derive income from activities and the sale or administration of loan portfolio granted by the company representing at least seventy (70%) of its total income.

54 Tax and Legal Services - PwC Mexico Investment institutions Mexican mutual fund investment companies have been growing significantly in number of funds, their size and the volume of transactions. Three main types of funds are available: 1. Fixed-income funds, which direct their investments mainly to high-, fixed- income securities denominated in pesos, such as Mexican governmental treasury certificates (CETES) and corporate or . 2. Variable-income funds, which are authorized to invest a large proportion of their assets in shares of companies listed on the stock exchange. 3. Risk-equity capital funds. Investment and mutual funds are authorized by the Ministry of Finance and are usually 7 operated by brokerage houses and banks. The Ministry authorization also contemplates the type of investor that may participate in the fund, e.g., individuals, corporate treasuries, nationals, foreigners, and employee savings and retirement funds. The investment institutions are regulated by the Investment Company Law (Ley de Sociedades de Inversión). Insurance and bonding companies are authorized by the National Insurance and Bonding Commission to invest their technical reserves in certain instruments. These entities commonly invest in the money market.

Retirement fund managers (AFOREs) The Law for Retirement Savings Systems regulates retirement savings systems and their participants by means of retirement fund managers. These organizations, known as AFOREs (Administradoras de Fondos para el Retiro), are financial entities that as from July 1, 1997 are exclusively and continuously engaged in the management of individual savings accounts and channel the resources of the retirement subaccounts of which they are composed under the terms of the Social Security laws through companies specializing in the investment of retirement funds (SIEFOREs) (Sociedades de Inversión Especializadas de Fondos para el Retiro). The exclusive purpose of these SIEFOREs is to invest the resources of individual accounts entrusted to them, in accordance with the terms of the Social Security laws. Authorization is required from the National Commission for Retirement Savings Systems (Comisión Nacional del Sistema de Ahorro para el Retiro) to operate as an AFORE or as a SIEFORE. The capital of AFOREs is controlled to reduce potential conflicts of interest, to assure the security of the operation of the system and to have better control over the investment of pension funds. It should be composed of Series “A” shares, which must account for at least 51% of the capital. The remaining 49% can be composed of Series “A” and Series “B” shares. Series “A” shares may be acquired only by Mexican nationals and Mexican entities majority-owned by Mexicans and controlled by Mexicans. Series “B” shares are unrestricted.

Doing Business in Mexico 2015 55 Foreign entities other than foreign government agencies may hold capital in AFOREs or participate in their management. Direct or indirect foreign participation of foreign financial institutions in the capital stock of AFOREs is regulated by the applicable international treaties and agreements, and will be subject to the regulations issued by the Ministry of Finance concerning compliance with such treaties and agreements. The only party permitted to participate in the fixed capital portion of a SIEFORE’s capital stock is the AFORE that requests its creation and its members. In no case may the participation of an AFORE in the capital stock of the SIEFORE it operates be less than 99% of the fixed portion of the capital stock of the SIEFORE. In addition to AFOREs, only workers investing in the resources of the individual accounts contemplated in the Social Security laws may participate in the variable portion of the capital stock of SIEFOREs.

Financial markets Securities market The amount of local capital available for investment in new or expanding industrial enterprises has increased considerably in recent years. A number of factors, including, principally, the rapid expansion of mutual funds (see above), which opened the market to small investors, created interest in equity shares traded on the Mexican Stock Exchange. In addition, the Intermediate Securities Market (Mercado Intermedio) was created to trade the capital stock of smaller and medium-size businesses. Foreigners are authorized to participate (buy and sell) in the Mexican Stock Exchange or in special funds created specifically for this purpose. The securities market law (Ley de Mercado de Valores) establishes international standard regulations covering stock market activities. See Chapter 6 for further discussion of the securities market and the Mexican Stock Exchange. Specialized financial markets Investment interest in Mexico has soared in the past several years and Mexican equities have been some of the most actively traded in the world. Mexican peso futures and options are traded on the Chicago Mercantile Exchange, providing the means for investors to make the most of the opportunities in Mexico today. The addition of futures and options on the Mexican peso represents a significant advance in risk management for all investors in Mexico, because they provide nearly limitless possibilities and combinations for trading and hedging in the Mexican peso. Some of the advantages are: Investors can trade forward foreign exchange on the Mexican peso, profits and losses are denominated in U.S. dollars, and there is an exchange of Mexican pesos for U.S. dollars at delivery. The Mexican Derivatives Exchange (Mercado Mexicano de Derivados MexDer) and the Mexican Clearing House (ASIGNA) are the result of the collaborative efforts of Mexico’s Ministry of Finance (SHCP), the CNBV and the Mexican Stock Exchange (BMV). MexDer and ASIGNA were designed to facilitate the modernization of the Mexican financial system and to ultimately turn Mexico into the major financial center of Latin America. MexDer and ASIGNA, pursuant to regulations promulgated by the SHCP, CNBV and the BMV, are established as for-profit corporations with self-regulatory mechanisms to

56 Tax and Legal Services - PwC Mexico permit supervision of the operation and financial situation of their respective participants. These self-regulatory functions govern contract execution, regulation of members, enforcement and compliance issues, and dispute resolution and disciplinary measures. The specific role of ASIGNA is to liquidate futures and options contracts executed on the MexDer and to act as counterparty in the context of these operations. Banks and investment banking firms are the only operating partners authorized to conduct operations on behalf of clients on the MexDer. Initially, the MexDer offered futures and eventually options with respect to a specific index, and dollar and futures. The intention is to permit trading in both dollar and interest rate options. The BMV developed the MexDer after consulting with the world’s largest stock exchanges in an effort to ensure a solvent and competitive market that would facilitate broad participation, reduce transaction costs, increase liquidity and provide better risk coverage in the management of portfolios. 7

International financial market Mexico provides the full range of international financial services to both residents and non-residents. Most major banks have full-service bank branches in the major international financial centers (including New York, Los Angeles, London, and Tokyo). Some foreign banks (mainly U.S., Spanish, British and Canadian), have opened subsidiaries in Mexico. There is an active foreign exchange market. However, because of Mexico’s proximity to the United States and because it is Mexico’s principal trading partner, most foreign currency transactions (purchases, sales, remittances, and futures) are carried out in U.S. dollars. Additionally, other foreign currencies (which are traded in very low volumes), including the euro, have fluctuated against the Mexican peso in similar proportions to the U.S. currency, as the Mexican peso is seen as pegged to the U.S. dollar in the European market. Eurobonds are not traded in Mexico, but Mexican corporations and individuals may invest in such instruments in foreign markets. Offshore financial services Mexican companies are free to carry out offshore activities, including banking transactions (deposits, borrowings, remittances and transfers). As mentioned above under “International financial market,” Mexican banks are authorized to open branches overseas and to carry out banking activities with both residents and non-residents of Mexico. Mexican taxpayers are required to file an annual information return when their source of income is located in a country deemed to be a tax haven or preferential tax regime by Mexican law or in a country with a territorial tax system. More information on the taxation of investment income can be found in the relevant chapters dealing with taxation of the different types of investors.

Sources of funds Short-term credit Commercial banks provide most local-source financing. Short-term credit is furnished on a line-of-credit basis and may be supported by a pledge of inventories or by discounting customer paper.

Doing Business in Mexico 2015 57 Short-term commercial credit is available only at interest rates that would probably range from 11% to 36% per annum for a bank loan in pesos to a Mexican subsidiary, even if repayment of the loan were guaranteed by a parent company having the highest credit rating abroad. Borrowers are also encouraged to maintain substantial compensatory balances on deposit with lenders. Banks generally charge rates similar to those for short-term peso credits on discounts of customer paper of manufacturing and wholesale enterprises, although somewhat lower rates are available for loans secured by inventory or fixed assets and for industrial mortgages. There are also entities called Savings and Popular Credit Entities whose main function is to provide short-term credit to its members. The advantage of these entities is that their interest rate is lower than the market interest rate. Local capital market Obtaining long-term capital is expensive in Mexico. Debentures of industrial and large commercial corporations may be listed on the Mexican Stock Exchange for sale to the public, and 30- to 90-day commercial paper is also being issued through the market by listed companies. Local private capital can usually be found to provide the majority ownership of Mexican companies, the minority shareholders of which are recognized foreign companies providing technical assistance and know-how. With the liberalization of passive interest rates and operational flexibility of the banking industry, the availability of lendable funds, together with the related interest rates, is determined by each major bank individually. Accordingly, company treasury officials should consult and possibly negotiate the terms and conditions of each entity’s financing needs with several banks before deciding on the most favorable source of funds. Availability to foreign investors There are no restrictions on foreign investors’ access to local sources of finance. However, foreign investors do not usually consider local sources of finance, since the cost of financing is high. Some restrictions apply to the ability to invest in government securities and in local quoted companies. Those interested in investing in Mexico are encouraged to consult with the international divisions of the Mexican banks and brokerage houses located in the major international financial centers and in Mexico.

58 Tax and Legal Services - PwC Mexico Impact of the Foreign Investment Law and NAFTA on the financial services industry Because of Mexico’s commercial opening, some years ago, modifications were made to legislation applicable to the Mexican financial system. The aim of these modifications was principally to allow and regulate the participation of foreigners in the capital of financial entities in Mexico and the establishment in Mexican territory of subsidiaries or subsidiary holding companies of foreign financial institutions resident in countries with which an international agreement or treaty had been executed for this purpose. Participation in the financial system The limit on foreign participation in the financial system is 49% for general deposit warehouses, financial leasing companies, financial factoring companies, mutual insurance companies and institutions, bonding companies, brokerage firms, and 7 retirement fund managers (AFOREs). However, Mexico has entered into commercial treaties with many countries and. we recommend that in each specific case, PwC Mexico should be consulted to determine whether at such time Mexico has a commercial treaty with special provisions allowing a higher percentage of foreign participation in the financial services industry.

FATCA’s (Foreign Account Tax Compliance Act) Implications for Mexico and Mexican Financial System The Mexican Ministry of Finance and Public Credit (SHCP, for its acronym in Spanish) in conjunction with the Treasury Department and the Internal Revenue Service by the United States, signed on November 19, 2012 an agreement to adopt the automatic and reciprocal exchange of information between the two countries, where U.S. citizens have accounts in another nation. In Mexico, since January 2013, FATCA requires foreign financial institutions to exchange information, through a report to the IRS where the existence and details of accounts of U.S. citizens are integrated. This was done in two stages, first during 2013 as a transition year for the banking and financial institutions to prepare the technological and operational infrastructure necessary to collect information from pre-existing accounts and to transmit it to the IRS. And the second step, which began in 2014, involves the reporting of the new accounts. Financial institutions in Mexico have an obligation to provide information to the Internal Revenue Service (SAT, for its acronym in Spanish) regarding U.S. citizens and residents who hold bank accounts, which together exceed USD 50,000, by the end of each year, so that the Mexican government can automatically report to the authorities of the United States information regarding its citizens (name, address, Federal Tax, average monthly balance and detail of their accounts whether in custody or deposit). Volcker Rule The members of the Mexican Board of Financial Stability System agreed in December 2013 that the latest approved version will have less impact than expected because the regulation accords similar treatment to financial transactions by U.S. institutions and worldwide.

Doing Business in Mexico 2015 59 The Mexican Financial Services Reform On January 10, 2014, the Financial Reform was published after the President´s approval, which amends, adds and repeals 34 financial and banking laws including the issuance of a new Financial Groups Law (Ley para Regular a las Agrupaciones Financieras). The Financial Reform aims to increase competition, strengthen banking regulation and improve transparency and is based on the following principles: • Increase competition and strengthen the financial controls of financial authorities, including increasing the Central Bank´s powers to regulate interest rates and banking fees. • Creation of new incentives so banks can provide more and cheaper loans. • Redefine the role of the Development Banks giving them more scope to lend to those who historically have lacked access to credit. With special emphasis on priority areas for national development such as infrastructure, small and medium sized enterprises, innovation and patenting. • Strengthen and improve financial regulation and supervision of financial intermediaries. • Requirements for banks to comply with Basel III capitalization rules are now set in law, which also requires banks to perform stress scenarios on an annual basis. The reform also establishes the Liquidity Regulation Committee that will set liquidity requirements for banks and monitor and publish the results. The reform makes modifications to 34 legal systems, grouped into 13 specific topics: • Strengthening of the National Commission for the Protection and Defense of Users of the Financial Services (CONDUSEF) • Savings and credit correspondents • Credit unions • Development banking • Execution and enforcement of guarantees • Bankruptcy Procedures • Public Bonded Warehouses and SOFOM´s • Liquidations and Insolvency • Investment funds • Securities market • Sanctions and foreign investment • Financial groups • Guaranteed Credit

60 Tax and Legal Services - PwC Mexico Chapter 8 Exporting to Mexico

Tips for exporters Mexico’s commercial conditions provide an excellent business environment and investment opportunity: Mexico is a member of the World Trade Organization (WTO), the Asia-Pacific Economic Cooperation Mechanism (APEC) and the Organization for Economic Cooperation and Development (OECD). Mexico constitutes an excellent potential customer for exporters, with its developing economy and a population of over 110 million. 8 Mexico lies in a strategic geographical location for international trade, sharing borders with the United States of America, while facing Europe and Asia, and representing an easy entry to the rest of Latin America. Mexico has signed ten Free Trade Agreements (FTAs), which provide for preferential duty rates on foreign trade operations with 51 countries, plus 30 Agreements to promote and protect foreign investment (APPRIs) and 9 Commercial Agreements under ALADI. FTAs signed by Mexico include NAFTA1; Free Trade Agreement (Costa Rica, El Salvador, Guatemala, Honduras, Nicaragua), FTA with: Colombia; Chile; Uruguay the European Union2; Israel; the European Free Trade Association3, and Japan. General Import Duty rates range from 0% to 35%, but most imports fall within the range of 3% to 20% (exceptionally, certain food products, shoes and textiles pay higher duties). Temporary imports are exempt from customs duties (except for fixed assets) and will pay value-added tax as of January 2015. However, if certain requirements are met, it is possible to obtain an automatic tax credit for such VAT. Mexico offers information through official and private commercial delegates worldwide.

1 North America Free Trade Agreement. 2 Austria, Belgium,Bulgaria, Denmark, Finland, France, Germany, Greece, Ireland, Italy, Luxembourg, the Netherlands, Portugal, Romania, Spain, Sweden, the United Kingdom, Cyprus the, Czech Republic, Estonia, Hungary, Latvia, Lithuania, Malta, Poland, Slovakia and Slovenia. 3 Iceland, Norway, Liechtenstein and Switzerland.

Doing Business in Mexico 2015 61 Import restrictions The Mexican government has continued its policy of progressive reduction of trade barriers to imports. Prior import licenses from the Ministry of Economy (SE) are required only for less than 1% of items or classifications in the customs tariff. Special requirements currently apply for importing products into Mexico in respect of health, ecology, quality, and consumer protection issues. These requirements have different specific formalities to comply with, depending on the product to be imported, and are usually identified by the subheadings included in the Harmonized Tariff System for Merchandise Classification and Codification. The special requirements are administered by government ministries such as the Ministry of Economy, the Ministry of Health (MH), the Ministry of Defense (SEDENA), the Ministry of the Environment, Natural Resources and Fisheries (SEMARNAP), and the Ministry of Agriculture and Livestock (SAGARPA). The importation of drug products or substances containing illegal drugs (acetylmorphine, pseudoephedrine, coca leaf, corn poppy, cannabis indica, etc.) is definitely banned.

Import duties Customs duties Tariff Classification Since the late 1980’s Mexico adopted the Harmonized Tariff System (HTS) for Merchandise Classification and Codification, making its import/export classification system compatible with those of most countries with which it commonly trades. The current General Import and Export Tariff Law has been in place since 2007 with some tariff code reclassifications and a general reduction in the duties.

Customs Law Customs Law in effect as from 1996, was designed to provide legal certainty, promote investment and exports and to comply with the international commitments undertaken by Mexico. This law incorporates a number of tax rules and operational authorizations on specific international operations.

Customs Valuation The customs valuation of merchandise to determine its taxable base is generally the transaction value of the goods, which is the value actually paid for the goods. In this sense, Mexico has adopted the valuation agreement approved by the WTO. Consequently, if a financial, commercial or other type of relationship exists between the foreign supplier and the Mexican importer (related parties), free competitive conditions must be satisfied.

62 Tax and Legal Services - PwC Mexico Rates Import duty rates range from 0% to 35%; however, most taxable merchandise falls within the range of 3% to 20%. Higher rates apply to different types of goods and to imports from certain countries, ranging from 30% to 260%. Examples of these goods include fabrics, leather, malt, beans, crabs, live chickens and hens, coffee-based extracts and extracts for juices. Compensatory quotas can raise duties up to 500%.

Special rates and customs associations Mexico has signed ten FTAs, such as the NAFTA, European Free Trade Agreement, European Free Trade Association, Central America FTA, Colombia, Chile, Uruguay, Israel and Japan. These FTAs require Mexico to apply preferential duty rates to the importation of goods from 45 countries. Additionally, some preferences are provided in the form of import duty reductions pursuant to per-country bilateral trade agreements signed under the Latin American Integration Association (ALADI). 8 Furthermore, Mexico signed economic cooperation agreements with Brazil, Argentina, under MERCOSUR (South America Common Market). All preferential customs rates may be requested by the importer if a certificate of origin is submitted before customs. In addition, the Ministry of Economy maintains Sectorial Relief Programs (SRPs) since 2001. SRPs are designed to support domestic manufacturers by allowing them to import components, raw materials, and equipment under a preferential import duty rate, regardless of their origin, provided that such items are used in the production of goods authorized by the corresponding SRP (most duty rates granted under these programs range from 0% to 5%).

Other taxes Merchandise whose sale or production within Mexico is subject to excise, production or other indirect taxes is also subject to these taxes on import. Usually, the taxable base for the calculation of these taxes is the customs value (transaction value plus related expenses), plus import duties. The expenses refer to those expenses paid abroad and related to the importation (i.e. freight, insurance). Additionally, most imports of tangible goods are subject to Value-Added Tax (VAT) at the same rate that applies to domestic sales (16%). Refer to Chapters 23 and 24 for more information on VAT and other indirect taxes.

Doing Business in Mexico 2015 63 Documentation procedures and technical barriers to trade Any special import license, when required, should always be obtained before the arrival of merchandise at a Mexican customs office and presented at the time of the customs clearance. Regular importers or exporters must be registered as a taxpayer. Aside from a customs declaration (pedimento), that is required for the customs clearance of goods, other documents that should be attached are the commercial invoice, freight and insurance. If the goods are imported from a country with which Mexico has a Free Trade Agreement, a “certificate of origin” of the goods is required in order to apply for preferential duties. Other charges In addition to import duties, the special production or excise taxes, and VAT are payable on imports. There are some countervailing duties for certain goods. Also, a customs processing fee is payable along with the import declaration, this fee is calculated depending on the type of import. For example, in the case of permanent or definitive imports the fee is 0.008 of the customs value of the goods. Review procedures Customs authorities are empowered to review any import or export operation and to carry out physical inspections of merchandise, wherever they are located within Mexican territory. Moreover, it is common to request information or support of the legal status of any foreign merchandise (including machinery and equipment). Therefore strict record keeping is recommended. Fines and other penalties Non-compliance with customs rules is severely punished in Mexico. Penalties include confiscation of the merchandise without possibility of recovery in extreme situations, late-payment penalties and assessment of omitted duties plus fines of up to 100% of the value of the goods may apply, in the worst case scenario, along with criminal prosecution.

Customs and storage The customs handling system uses a computerized tracking and traffic control system, including warehousing. Customs and storage facilities are adequate and secure. Regular customs clearance should be made by the importer within two days up to two months4, depending of the type of good and arrival location. Shipments are subject to being declared as abandoned, after the deadline stated above. Customs authorities will grant a 15-working-day period for customs clearance. Once this second period expires, the property is automatically transferred to the Mexican Government.

4 For example: explosives, flammable materials, contaminating, radioactive or corrosive products, perishable goods, and live animals, in which case the goods must clear customs during the three days commencing one day after the date of arrival.

64 Tax and Legal Services - PwC Mexico Port of entry and inland transport Ports of entry The most important ports of entry, based on volume of merchandise handled, are as follows: Gulf of Mexico (Atlantic coast): and Tampico-Altamira. Pacific coast: Manzanillo, Lázaro Cárdenas and Acapulco. Northern border: Nuevo Laredo in the northeast, Ciudad Juárez, and in the northwest. Air shipments: Mexico City, , , and others Inland transport The Mexican railroad system serves the following ports of entry: Nuevo Laredo, Matamoros, Piedras Negras, Ojinaga, Ciudad Juárez, Nogales, , and Tijuana, all along the northern border; Matamoros, Tampico-Altamira, Veracruz and Poza Rica on the Gulf coast; and Mazatlán, Topolobampo and Salina Cruz on the Pacific coast. 8 All major cities/destinations are served by privately owned trucking companies. Exporters should consult with their importer/customer ahead of time to determine the optimal logistics applicable, depending on type of goods, volume and final destination. Bonded warehouses Goods may also be held in bonded warehouses operated by private companies under a government authorization. Import duties are deferred and adjusted for inflation when goods are taken out of the bonded warehouse, at the time of the importation. Foreign tax residents are allowed to maintain goods in any bonded warehouse for local delivery without triggering a “permanent establishment”. (See Chapter 16).

Re-exports Temporary imports Mexican customs regulations contain special provisions for temporary importation of goods. Allowing the deferral of import duties from six to eighteen months (in certain cases for longer periods). Goods can be imported under temporary basis to return abroad in the same condition as imported, such as in the case of containers, exhibit merchandise, aircraft, ships, and trailers. But also, goods can be imported under temporary basis to be transformed, processed or repaired under an IMMEX program. See Chapter 4 for a description of the incentive programs under which temporary imports are allowed. Sales to the Mexican government The government procurement law establishes the rules with which companies must comply if they want to sell their products or services to government entities. NAFTA provides less stringent rules for suppliers domiciled in the United States and Canada.

Doing Business in Mexico 2015 65 Free trade zones within Mexico There are no free trade zones in Mexico, although free-trade-zone concept has been adopted by the border region concept, granting lower duties in some cases. The border region consists of the 20-kilometer stretch lying on both the northern and southern Mexican borders, Baja California Norte, Baja California Sur and Quintana Roo states, and the district in Sonora, as well as a part of the same state. Within this region, companies may import goods, either exempt from duties or with a maximum import duty rate of 5%, depending on the product, as long as the products do not enter parts of Mexico. In any case, a specific analysis is required to determine whether the incentives provided within the border region may apply to a specific company.

Local representation Market surveys Before starting any engage in export sales to Mexico it is essential to survey existing and potential markets. For this purpose PricewaterhouseCoopers maintains a fully integrated international trade practice staffed with customs and trade specialists (World Trade Management Services). Local agent or customs broker Although is possible for a Mexican tax payer to perform an import or export, a customs broker or local agent is recommended to withdraw merchandise from a Mexican customs office. If delivery of goods is made to a customer within Mexico, the supplier is subject to Mexican VAT and may be subject to income tax. However, see “Bonded warehouses” above and Chapter 16 for the tax treatment of local sales through the use of a bonded warehouse. Employee/salesperson The definition of what constitutes a “permanent establishment” for Mexican income tax purposes (i.e., whether a foreign corporation is deemed to be engaged in a trade or business in Mexico) should be considered. See “Permanent establishment for income tax purposes” in Chapter 16. A permanent establishment of a foreign corporation is deemed to exist if the corporation carries out activities through a representative who acts under detailed instructions or receives guaranteed remuneration, as well as when the representative has the authority to execute contracts or deliver merchandise within Mexico on behalf of the foreign entity. Consequently, if a foreign corporation desires to appoint a sales representative, care should be exercised to ascertain that the relationship is that of an independent contractor and not that of an employee, in order to avoid being deemed a permanent establishment. However, if there is a tax treaty in effect between the country of the foreign corporation and Mexico, the definition of permanent establishment should be analyzed on a case-by- case basis. Under the definition of most treaties, merely having a limited activity sales representative who does not have the power to negotiate contracts may not give rise to a taxable permanent establishment in certain cases, although certain employee taxes and labor obligations may still apply.

66 Tax and Legal Services - PwC Mexico Sources of information Overseas Parties interested in exporting to Mexico may consult with the commercial attachés of Mexican embassies around the world or the international trade specialists assigned to foreign branches of Mexican banking institutions in most major financial centers worldwide. In Mexico For general information on Mexico’s trade potential, you may approach the commercial attaché of your country’s embassy as a preliminary contact. Additionally, most of Mexico’s major trading partners have a specialized Mexico-related chamber of commerce (the United States, the United Kingdom, France, and Germany, among others). For more detailed information see Appendix XVI. You may also contact the following: 8 • Ministry of Economy (Secretaría de Economía). www.economia.gob.mx • Mexican Foreign Trade Bank (BANCOMEXT). www.bancomext.com • Mexican Industrial Information Fund (Fondo de Información y Documentación para la Industria - INFOTEC). www.infotec.com.mx • National Association of Importers and Exporters of the Mexican Republic (ANIERM). www.anierm.org.mx • PROMEXICO. http://www.promexico.gob.mx And, of course, you may also contact the PwC Mexico specialists. www.pwc.com/mx

Doing Business in Mexico 2015 67 68 Tax and Legal Services - PwC Mexico Chapter 9 Business entities

Guide to “doing business” entities Choice of entity A potential investor, domestic or foreign, has free choice to operate through almost any form of entity. A stock corporation (S.A., S.A. de C.V. or S.A.P.I.) is the most commonly used entity for a subsidiary of a foreign corporation, although sometimes a general partnership with unlimited liability (Sociedad en Nombre Colectivo), a limited partnership (Sociedad en Comandita) or a limited liability company (Sociedad de Responsabilidad Limitada) is used, especially if the objective is that the Mexican entity be treated as a foreign partnership for tax purposes in the investor’s 9 home country, where applicable. A foreign corporation may also conduct most business activities through a registered branch or permanent establishment in Mexico, such as a Representative office with or without income. Government approval Prior authorization to use a specific corporate name is required from the Ministry of Economy (Secretaría de Economía) to form any business entity in Mexico. No approval is needed to amend its charter or bylaws unless the amendment involves either a change in the corporate name or the substitution of a provision allowing foreign participation for one prohibiting foreign participation. Certain activities may require prior authorization from the Foreign Investment Commission if the entity will be wholly, partially or neutrally owned abroad. See Chapter 5 for details on restrictions on foreign investments. Formation requirements The minimum share capital for a regular corporation established as an S.A., S.A.P.I. or S.A. de C.V. is that determined by the charter or bylaws of incorporation; it is customary that such minimum share capital be in the amount of $50,000 pesos, and every corporation must have at least two shareholders. After all necessary governmental authorizations have been secured; the charter and bylaws must be formalized pursuant to a public instrument executed before a public attester (notary public or public broker). The corporation must then be registered in the Public Registry of Commerce (Registro Público de Comercio) and with all tax and regulatory authorities, as the case may be.

Doing Business in Mexico 2015 69 Repatriation of funds There is no restriction on remittance of profits or on the repatriation of initial or subsequent investments. The sale, exchange or transfer of shares issued by a Mexican corporation is generally treated as a taxable event, and any resulting gain is considered as from Mexican sources, irrespective of the residence of the selling shareholders or where the transfer takes place. Applicable tax treaties reduce or eliminate the capital gains tax. Tax considerations No Mexican companies are considered as transparent for income tax purposes in Mexico, even if they are classified as partnerships or flow-through entities for foreign purposes. However, certain Mexican trusts are considered transparent for income tax purposes (see Chapter 21). All Mexican resident companies are taxed in the same manner and must use the calendar year for legal and tax purposes. Intercorporate dividends are not taxed twice, although if the recipient corporation has employees, its dividend income would again be subject to mandatory profit sharing. Per recent amendments to the Income Tax Law, as of January 1, 2014, Mexican individuals and residents abroad (whether individuals or legal entities) are taxed with 10% withholding with respect to the dividends distributed in their favour by Mexican business entities. Said Mexican entities are obliged to withhold and pay such tax to the Mexican federal tax authority (Secretaría de Hacienda y Crédito Público). Professional advice Legal and tax advisers should be retained early in the planning stages to secure the necessary government approval and design the most flexible and desirable corporate structure best suited for the particular global group, as well as to ensure a smooth setup and regulatory compliance.

Forms of business enterprise The main different forms of organization of business entities in Mexico are regulated by the General Law of Mercantile Companies (Ley General de Sociedades Mercantiles), Securities Market Exchange Law (Ley del Mercado de Valores) the Commercial Code (Código de Comercio) or the Civil Code (Código Civil). Some of these forms are summarized in Table VI below and are discussed in more detail later in this chapter.

70 Tax and Legal Services - PwC Mexico VI—Principal Forms of Business Enterprise

Sociedad Anónima (S.A.), Sociedad Stock corporation, stock corporation for the promotion of Anónima Promotora de Inversión investment and stock corporation with variable capital. (S.A.P.I.) or Sociedad Anónima de (These are the forms most commonly used by domestic and Capital Variable (S.A. de C.V.) foreign investors)

Sociedad de Responsabilidad Limited liability company. (Used frequently) Limitada (S. de R.L.)

Sociedad en Nombre Colectivo General partnership. (Rarely used by foreign investors (S. en N.C.) because of unlimited liability, unless they want to qualify as a foreign partnership in the home country)

Sociedad en comandita (S. en C.) Partnership with limited and unlimited liability partners.

Sociedad Civil (S.C.) Civil partnership, i.e., of a noncommercial nature. (Used for non-profit entities and by professional practitioners) 9

Asociación en Participación (A. en P.) Joint venture contract. This is not a legal entity but is treated as a separate entity for income tax purposes.

Sucursal de sociedad extranjera Branch of a foreign corporation.

Comerciante Sole proprietorship. (A foreigner must qualify as a permanent Empresa de persona física resident “inmigrado” to be able to do business in this way)

Asociación Civil (A.C.) Civil association. (Used by charitable and other nonprofit organizations)

Oficina de Representación Non-income or income-earning representative office con o sin ingresos

Corporate law is federal in nature and applies throughout the country. Although civil law is a matter of state law, the different state civil codes are practically identical as to the formation of entities of a civil nature. (For points to consider in setting up a business operation in Mexico, see the following Appendix XIII, XIV, XV and XVIII.)

Doing Business in Mexico 2015 71 Stock Corporation A most common way for domestic and foreign investors to operate in Mexico is through a stock corporation (Sociedad Anónima—S.A.) formed under the General Law of Mercantile Companies (Ley General de Sociedades Mercantiles). In this case, the corporate name selected is followed by the words Sociedad Anónima or the acronym S.A., which indicates that it is a stock corporation. A foreign-owned Mexican corporation is subject to the laws relating to all local companies in general, as well as to the Foreign Investment Law (Ley de Inversión Extranjera) discussed in Chapter 5. Formation procedures As indicated above, after the approvals by the Ministry of Economy, in forming the company, the authorization is reproduced in a notarial instrument, which represents the combined charter and bylaws. The principal matters covered in the permit are the name and type of corporation. Upon incorporation, when foreign ownership of shares is permitted, a statement known as the Calvo Clause (Cláusula Calvo) is included. This clause states that any foreign shareholders must consider themselves as Mexican nationals with respect to their stock ownership and agree not to invoke the protection of their governments in matters connected with such ownership under penalty, in the case of non-compliance, of forfeiting their holdings in favor of the Mexican state. In a few cases, specific authorization may be required from the Foreign Investment Commission, as indicated in Chapter 5. The formation of a Mexican stock corporation usually takes an average of four weeks if no permit is required from the Foreign Investment Commission. Certain details of the initial shareholders are also included in the notarial instrument of incorporation, including the names and identification of founding shareholders and their Mexican Taxpayers’ registration or foreign tax ID; the amounts of capital contributed by each and the terms for payment of any amounts due; the names of the initial officers (president, secretary and treasurer), members of the board of directors or sole administrator and inspector of accounts (statutory auditor—comisario), as well as the granting of powers of attorney for the representatives acting on behalf of the stock corporation. The charter and bylaws must be certified by a public notary or a public broker and recorded in the Public Register of Commerce of the state where the corporate domicile is located. The stock corporation is considered to exist as from the date of the notarial instrument. Minimum details regarding each new corporation, but not its shareholders, must be filed with the Ministry of Finance (Secretaría de Hacienda y Crédito Público).

72 Tax and Legal Services - PwC Mexico Capital structure A Mexican corporation may never have less than two shareholders; there is no limit on the maximum number.

Minimum capital-authorized, issued, paid-in There is no mandatory minimum paid-in capital. The charter or bylaws of the corporation may freely determine such amount; note that it is customary for Mexican corporations (S. A. or S.A.P.I.) to determine a minimum share capital in the amount of $50,000 pesos. Notwithstanding, at least 20% of the minimum capital must be paid in full at the time of incorporation when paid in cash, and 100% when paid in kind. The authorized capital should be fully subscribed within one year. Additional capital stock cannot be issued until the outstanding shares are fully paid. Shares paid for with assets in kind must be held in the treasury of the corporation as restricted stock for a term of two years. If at the end of the period the value of the received assets is 25% lower than that at which they were received, the shareholder must pay in the difference to the stock corporation. A stock corporation may not acquire its own shares, except through a court judgment in order to pay the liabilities of the corporation, in which case the shares must 9 be sold within three months or the capital stock must be reduced accordingly. There is an exception to the above-mentioned rule for publicly traded companies, which can hold their own shares in treasury for up to one year. If the treasury shares are not re-issued by the end of that term, they must be cancelled and the capital stock reduced.

Par value/no-par-value The shares must have a stated par value. All shares must be of equal value and confer equal rights to their holders. Shares must be represented by stock certificates.

Types of share ownership All shares must be registered shares.

Classes of shares Mexican corporate law specifies that under no circumstances may one or more shareholders be excluded from participating in the profits. In the case of shares having limited voting rights, i.e., limited to extraordinary shareholders’ meetings (referred to below), a cumulative dividend of not less than 5% per annum must be granted by law. The charter may provide that these shares will receive higher rates of dividends than the common shares. Debentures convertible into shares may also be issued. Where a minimum percentage of the stock must be held by Mexican nationals, a separate series of shares must be issued that may not legally be owned by non-Mexicans, except for permanent immigrants in certain cases. A second series, usually with identical rights, may be freely subscribed. Upon recent reforms to the General Law of Mercantile Corporations, it is allowed to issue share titles that: 1. Do not confer right of vote, or that the vote is limited to specific matters. 2. Grant non-economical social rights, different to the right of vote or exclusively the right of vote. 3. Confer the right to oppose or that the favorable vote of one or more shareholders regarding resolutions on shareholders meetings is required.

Doing Business in Mexico 2015 73 Loans and debentures Stock corporations may issue mortgage obligations or unsecured debentures, which may be listed on the stock exchange for sale to the public, or may contract loans with or without guarantee, as desired.

Increases and decreases in capital Modifications of the minimum authorized capital stock are considered amendments to the charter of incorporation and, in some cases, require permission from the Foreign Investment Commission. Existing shareholders have the preferential right to subscribe to any authorized increases in capital or to submit some of their shares for redemption if the capital is reduced, in proportion to the number of shares held by each shareholder in the capital stock of the corporation. Reductions in minimum authorized capital must be published three times in the Official Gazette to provide protection for creditors. Shareholders may also vote to make additional capital contributions for which shares are not received, sometimes to absorb losses incurred or to require the payment of a premium by subscribers to new shares. Such share premium accounts can subsequently be distributed to the shareholders (in proportion to their shareholdings, rather than in proportion to their original payments of the premium), although this is rarely done before liquidation. The provisions of the General Law of Mercantile Companies specifically authorize the capitalization of surplus arising from the revaluation of assets, as long as the revaluation surplus is based on an independent appraisal by professional appraisers recognized by the Securities and Exchange Commission and is shown on a balance sheet previously approved by the shareholders. If the revaluation surplus relates to investments in shares or commodities, it must be based on certified market quotations. However, such revaluation surpluses may not be in accordance with Mexican Financial Reporting Standards (See Chapter 12). Certain limitations on the amounts of revaluation surplus that can be capitalized are also imposed on corporations listed on the Mexican Stock Exchange.

Transferability of shares Transfers of registered shares are not valid until they are recorded in the share registry book kept by the stock corporation.

Liability of shareholders Shareholders are liable only for the amount of their subscribed capital. A seller of partially-paid shares is jointly liable with the buyer for any unpaid balance thereof for a term of five years.

74 Tax and Legal Services - PwC Mexico Relationship of shareholders, directors and officers Conduct of the entity The shareholders gathered in a general meeting are the supreme authority of a corporation. A minority shareholder usually has no legal recourse against a decision legally taken by the majority, if lawful. In this connection, the charters of corporations with substantial minority shareholders, such as those that are 49% owned by foreigners, often provide that resolutions in certain key specified areas, such as amendments to the charter, incurring substantial indebtedness, appointments of higher-level employees and their salaries, etc., may be validly approved only by, say, 60% of the total shares outstanding, or, if applicable, of the members of the board of directors. The shareholders may elect either a sole administrator or a board of directors to manage the affairs of the stock corporation. The charter and bylaws will specify the powers and responsibilities of the administrator or board, as well as any specific acts that might require a resolution of the shareholders, such as, in some cases, disposition of real property or acceptance of substantial loans. A sole administrator is occasionally preferred during the organizational phase of a business, and the company elects a board 9 of directors later. This should be provided for in the original charter in order to avoid the necessity of holding an extraordinary meeting of the shareholders and formalization of the minutes of the corresponding meeting before a public attester (notary public or public broker). Directors are usually elected for one year or until replaced, and it is customary to elect alternate directors to facilitate having a quorum, particularly if one or more of the directors reside outside Mexico. Meetings of the board are usually held at the domicile of the corporation. The charter normally authorizes the board to name a general manager for the actual operation of the business of the corporation and should specify any powers or responsibilities that the board may not delegate.

Meetings Mexican law requires at least one annual general meeting of the shareholders and specifies that certain matters may be handled only at extraordinary meetings. Annual meetings must be held at the geographical area of the corporate domicile of the company within four months following the end of every year. Such meetings are held to approve the annual financial statements, decide on the distribution of the profits for the year and elect directors and the inspector of accounts (statutory auditor or comisario). Extraordinary meetings must be held to approve any modification of the charter and bylaws, mergers or issue of debentures. Other matters may be specifically reserved in the charter for such meetings, at which resolutions must be approved by more than 50% of the outstanding capital stock entitled to vote. The charter of incorporation may require a larger majority in special cases, as mentioned above. Each share represented at a meeting may have only one vote, and some classes of shares may be limited to voting only at extraordinary meetings. The required prior call for a meeting of shareholders may be omitted if 100% of the outstanding shares are present or represented at the meeting.

Doing Business in Mexico 2015 75 Dividends & legal reserve 5% of annual net profits must be set aside in a statutory legal reserve until its balance equals 20% of the capital stock. Dividends may be validly declared only by a meeting of shareholders and on the basis of a balance sheet that shows sufficient accumulated profits available for distribution. Accordingly, dividends cannot be declared until losses of prior years have been absorbed. If dividends are paid without fulfilling these conditions, the shareholders and the administrators who authorize the payments may be held jointly liable for the return of the funds to the corporation upon demand of a dissatisfied shareholder or creditor. Liquidation The charter should also specify the circumstances in which the corporation may be dissolved and the procedures for naming one or more liquidators and for carrying out a liquidation. The law includes as a cause for liquidation the accumulation of a deficit equal to more than two-thirds of the capital stock. Although the law provides no penalties, if a corporation continues to operate in such a situation, an unpaid creditor or dissatisfied minority shareholder might bring court action to force the company to enter into liquidation. Shareholders usually have equal rights in a liquidation, based on their paid-in contributions, although shares having limited voting rights must be redeemed before common shares. Shares may not be redeemed until all creditors are paid, although partial redemptions may be made if the agreement to make such a payment is published three times in the Official Gazette within a period of 30 days and if creditors do not object. The final liquidating balance sheet showing the net amount payable on each share must be so published before redemption can be completed. For legal purposes, liquidators must retain the books and records of the company for a period of ten years. Books and records In addition to the accounting records mentioned under “Books and records” in Chapter 11, corporations are required to maintain bound books for minutes of meetings of shareholders and the board of directors, as well as a share registry book and capital stock variations book. Statutory audit All companies incorporated under Mexican law are required to appoint one or more inspectors of accounts (statutory auditors or comisarios), as described in “Audited financial statements” in Chapter 11,except for public companies whose shares are traded on the Mexican Stock Exchange. The latter must appoint a firm of auditors and must have an audit committee.

76 Tax and Legal Services - PwC Mexico Stock Corporation with variable capital Capital structure The most common type of stock corporation is the stock corporation with variable capital (Sociedad Anónima de Capital Variable—S.A. de C.V.). There is no mandatory minimum paid-in capital for the organization of a corporation. The charter or bylaws of the corporation may freely determine such amount; it is customary for Mexican corporations to determine a minimum share capital in the amount of $50,000 pesos, which used to be mandatory. Usually, an unlimited maximum capital stock is provided for most of these companies. The procedures for the increase and decrease of the variable portion of the capital stock should be established in the charter. The law allows considerable latitude in this area. This should be approved by means of and extraordinary shareholders’ meeting in terms of article 182 of the law Since Mexican corporations may not hold their own shares, an arrangement providing minimum formalities for the issue of additional variable capital may prove to be a good substitute for treasury shares. However, whether it is stated in the charter or not, an increase in capital stock must first be offered to existing 9 shareholders, who have the right to purchase the same proportion of the increase as they hold in the existing capital stock, before the increase can be offered to outsiders. Capital increases of corporations having foreign investors, whether a majority or not, may require the approval of the Foreign Investment Commission, although, in accordance with the regulations under the Foreign Investment Law and the National Registry of Foreign Investment (Registro Nacional de Inversiones Extranjeras), discussed in Chapter 5, prior authorization is not required in the majority of cases. Except as regards matters related to the variable portion of its capital stock, the S.A. de C.V. is identical to the Sociedad Anónima.

Other considerations Stock Corporation for the promotion of investment The SAPI was created in order to provide joint-venture investors with a suitable vehicle to enter into covenants which reflect the intention to develop an investment and ultimately cash in the benefits and part ways, allowing the issuance of much tailored stock, and acknowledging enforceability to certain shareholder agreements which were deemed void under business forms. In most respects, this type of entity is identical to the Sociedad Anónima, exception made for the form of management which must be entrusted to a board of directors, exclusively. Limited liability company In most ways the limited liability company (Sociedad de Responsabilidad Limitada,S. de R.L.) is similar to a corporation in actual operation. However, as an organization of individuals, its bylaws can be drafted in such a way as to give it most of the characteristics of a partnership under the tax laws of foreign countries, except for unlimited liability. Formation procedures This form of organization requires the same prior authorization and registration as a Sociedad Anónima. Costs and time required for organization are essentially the same. The S. de R.L. may be organized by no less than 2 and with up to 50 persons (including

Doing Business in Mexico 2015 77 corporations), minimum equity capital should be $2 pesos, one peso per partner, since each equity interest partnership quota shall be of one peso or a multiple of this amount, thus considering at least two partners are required for incorporation purposes thus such amount of minimum equity capital can be established. Considering this restriction, the charter or bylaws of the S. de R.L. may freely determine minimum equity ; note that it is customary for this type of entities to be organized with a minimum equity capital of $3,000 pesos, which used to be mandatory. No equity certificates are mandatory to be issued, and investors participate in profits and vote at general meetings in proportion to their equity investment. Unanimous agreement may be required to transfer or increase the equity accounts or take in new investors, although the charter may reduce this requirement. In the case of transfers to a new investor, the existing investors have a prior right to acquire the capital account to be sold. Transfers to the heirs after an investor’s death do not require the consent of the other owners unless the charter provides for dissolution of the company upon the death of any investor. Investors are liable only for the amount of their agreed contributions to the capital of the company, 50% of which must be paid in immediately when paid in cash at the time of incorporation, and 100% when paid in kind. S. de R.L. entities can adopt the variable capital form as similar as that mentioned for a stock corporation with variable capital. In such event the corporate name must be followed by the words Sociedad de Responsabilidad Limitada de Capital Variable or its acronym S. de R.L. de C.V. Equity capital variations must be approved in the partners (investors) meetings. Relationship of investors and managers The investors may name one or more managers or administrators, or they may elect to operate the business without any centralized administration. In any event, the general meeting of investors, which is required to be held at least once a year, is the highest authority of the company and the only one that may authorize a distribution of profits. All investors have the right to vote at the meetings, with the votes being counted in proportion to the equity account of each investor, having one vote per each Mexican peso or its multiples, as may be determined by the charter or bylaws. Liquidation The applicable rules are the same as those for a Mexican corporation. Books and records The requirements are the same as for a corporation, except that the limited liability company uses a registry book of the equity accounts of the investors in place of a share registry book. Board of Managers and Board of Examiners If the charter so prescribes, the investors may elect a board of managers entrusted with the administration of the company, as well as a board of examiners (consejo de vigilancia), which carries out duties similar to those of the inspector of accounts (statutory auditor) of a corporation.

78 Tax and Legal Services - PwC Mexico Partnership The General Law of Mercantile Companies also provides for partnerships (Sociedades en Nombre Colectivo), as well as for partnerships with limited and unlimited liability partners (Sociedades en Comandita), but as a result of the unlimited liability (lack of corporate veil) of all or the general partners, as the case may be, these business forms are not common. These business forms have most of the attributes associated with the U.S. concept of a partnership because of the unlimited liability of the partners so designated. Partnerships require at least two partners.

Civil partnership Professional practitioners are usually organized as a civil partnership (Sociedad Civil –S.C.), which resembles in many ways the limited liability partnership (S. de R.L.) mentioned above. The managing partners have unlimited liability, while other partners’ liability is limited to the value of their contributions (2704 Civil Code). This form is also used by some non-profit entities such as educational establishments. By definition, these entities should not engage in commercial operations (any activities involving 9 commercial speculation). The transferability of rights, as well as the admission of new partners, is subject to approval of all the partners. In general, a civil partnership is taxable in the same manner as a corporation. However, civil partnerships involved in educational, cultural, and other activities specifically listed in the Mexican income tax law may be classified as non-taxable entities if a specific authorization is obtained. Distributions of interim profits to the partners are treated as deductible salaries (fully deductible by the S.C.), and distributions of retained earnings are treated as corporate dividends.

Joint venture contract The joint venture contract (Asociación en Participación–A. en P.) is one whereby a person grants a participation in the profits and losses of a specific venture or business to others who provide property or services. Such a contract has no legal personality, i.e., a separate legal entity is not created, and operations are conducted in the name of the active managing joint venturer (asociante). The joint venturer (asociante) is the only one with any direct liability to third parties. The silent partner (asociado) has no direct relationship with third parties. The tax treatment applicable to the Asociación en Participación is essentially the same treatment as regular corporations solely for tax purposes. See Chapter 19 for additional tax aspects of the joint venture contract. Legal requirements for a valid joint venture contract are minimal. Basically, the contract should identify the contracting parties; specify the contributions and obligations of each under the contract, the purpose of the venture and the life of the contract; and establish the method for distributing profits and losses. Formation procedures A joint venture contract need not to be registered, although a signed written agreement must exist.

Doing Business in Mexico 2015 79 Capital structure There are no requirements as to minimum capital, and there are no shares. It is often stipulated that foreign venturers should receive a maximum of 49% of the profits of the venture, in which case attorneys believe that neither approval nor registration with the Foreign Investment Commission is required. However, legal advice is necessary to comply with requirements, if applicable. Higher percentages of participation would require prior approval of the Commission. Relationship of venturers and managers Full responsibility for managing the venture rests with the joint venturer (asociante), although some contracts for large ventures, often in the construction field, provide for the establishment of a technical committee with representation of the silent partners (asociados) as well and with responsibilities quite similar to those of the board of directors of a corporation. In such cases a representative of the managing venturer would be in charge of the committee and the venture. Liquidation The procedures for liquidation that are used are those of a partnership, except that, unless the contract contains other provisions, a joint venture contract is considered as terminated upon the death of any of the venturers. Books and records Managing venturers must keep accounting records of the operations of the joint venture, separate from their other activities. Tax returns must also be filed for the joint venture operations separately from those of the asociante.

Branch of a foreign corporation A foreign corporation can be registered to operate in Mexico, with full access to the local courts, through a branch office (sucursal de sociedad extranjera) after complying with certain formalities as well as obtaining the prior approval of the Mexican government through the General Department of Foreign Investment of the Ministry of Economy, exception made for those foreign corporations from that certain countries with which Mexico has entered into a free trade agreement (i.e. United States of America, Canada, among others), in which event there is no need to obtain prior authorization, but only to file a notice with the abovementioned authority. The Foreign Investment Commission has expressed a willingness to authorize Mexican branches of non-resident companies, except in those activities where foreign investment is restricted. Please refer to Chapter 5. A principal advantage to setting up a branch office in Mexico is establishing the presence of the foreign company in Mexico without the necessity of having a local board of directors or being subject to the provision of the General Law of Mercantile Companies applicable to Mexican companies. However, a disadvantage of this form of organization is that because a branch has no independent legal status in Mexico, the parent company will be liable for any claims arising out of activities performed by the branch office.

80 Tax and Legal Services - PwC Mexico Sole proprietorship As in many Western countries, the sole proprietorship (comerciante/persona física) is a very popular form of organization for small businesses. However, the element of unlimited liability generally inhibits the use of this form of organization for large operations, particularly in view of the substantial amount of severance pay that may accrue in favor of employees. Moreover, resident aliens may engage in business activities only if their immigration status is that of a permanent resident (inmigrado). However, in some instances it has been concluded that non-resident individuals with a taxable permanent establishment might operate under the same principles applicable to branches of foreign entities.

Non-profit organizations Charitable and other non-profit organizations take the form of a civil association (Asociación Civil–A.C.), whose charter prohibits the distribution of profits to its members. 9

Doing Business in Mexico 2015 81 82 Tax and Legal Services - PwC Mexico Chapter 10 Labor relations and social security

Investor considerations • Labor is readily available in most regions of Mexico, with internationally competitive levels of efficiency. • Basic daily minimum wage is low; in 2014 it was increased 3.9% • Fringe benefits, including labor law benefits, are significant relative to total payroll costs. • Unionization and collective labor contracts are common in both capital- and labor-intensive industrial enterprises. • Turnover is moderate, especially in the highly competitive labor-intensive industries. • Profit sharing is mandatory for most business concerns with employees and amounts to 10% of adjusted taxable income. • Social security system is in effect for all industrial areas and 10 many agricultural zones. • Social security premiums are payable by both the employer and the employee. Compliance with general provisions of Labor Law, as well as Social Security, Hygiene, Safety and Environmental care are monitored by the authority and default is subject to sanctions which may be material in some cases. Outsourcing of labor force and services are subject to specific compliance rules. • Employment of foreign nationals is generally limited to 10% of the total workforce; certain exceptions apply when a free-trade agreement is in effect. Work visas are required.

Doing Business in Mexico 2015 83 Labor relations Availability of labor Because of rapid population growth, unskilled and semiskilled labor is readily available throughout Mexico. With the rapid expansion of labor-intensive processing plants (maquiladoras), a pool of skilled labor is also available, especially in the northern border areas. Most companies find that the skills of the younger members of this pool can easily be upgraded through adequate training programs, particularly in the less-industrialized areas. Skilled technical and professional personnel and well-trained office workers can usually be found, or less-experienced personnel can be trained for more demanding positions. Employer/employee relations Comprehensive labor legislation has been in effect for many years. The federal labor law is clearly intended to favor the employee in all relations with an employer, as it contains the principle, previously sustained by the labor authorities and the Supreme Court, that in case of controversy in the interpretation of the law, the treatment most favorable to the employee will always take precedence. Nevertheless, in most cases companies are able to employ and keep satisfactory employees at all levels. Unions The law provides that 20 or more employees may form a labor union to bargain collectively with the employer regarding the terms of their employment. Such labor unions are formed in many cases, and collective labor contracts are executed in the case of industrial enterprises. Contracts usually amplify or add to the rights enjoyed by the workers under the federal labor law or the social security law and are subject to renegotiation at least every two years. The labor law provides that an application for review of the daily-rate cash wages shall be made at least thirty days before the end of one year following execution, review or extension of the collective labor contract. The contract clauses regarding salaries and other benefits may be reopened after one year. Labor unions are particularly strong in the petroleum, mining, education, entertainment, textile, restaurant, telephone, rubber, sugar, automotive and newspaper industries. Labor unions have traditionally used the threat of a strike during the negotiation process to exert pressure on management, but negotiations are usually concluded before reaching the stage where the employees actually strike. The Labor Ministry is empowered to mediate and rule on labor disputes and to impose sanctions on unions or employers for labor law infringements. Additionally, and in an effort to end a long tradition of irregularities in some unions, the Mexican government has taken steps to avoid abuses of power and to limit the unions’ activities to their intended purpose of employee protection and welfare. Managerial employees Confidential employees (i.e., those in positions of trust) are those who exercise the functions of management, supervision, inspection, and auditing when these functions are of a general nature. The principal provisions that relate to confidential employees are that the employer is not required to reinstate them in their jobs in case of unjustified dismissal, they are not entitled to belong to a union, and they are not entitled to vote in strike proceedings.

84 Tax and Legal Services - PwC Mexico Employee training programs Mexican labor law requires all employers to provide their employees with a minimum of training, and for this purpose requires the formation of training committees composed of members of management and of the workforce. The law does not establish the minimum training by number of hours or days but states that the training should allow workers to improve their skills, prepare them for higher positions that may become available, improve their productivity and general welfare, and minimize work-related accidents. All trades and industries should participate and provide minimum training and should submit their programs to the Labor Ministry. Training may also be provided externally through institutions registered for this purpose. Training programs are not directly subsidized by government funds; however, the employer is allowed a corporate tax deduction for program costs and expenses. Entities engaged in the high-technology industries are the employers participating most actively in training programs. Workers’ councils Except in relatively isolated cases where the government has taken over an industry (principally, the oil industry and electric utilities) there has been relatively limited demand for greater labor participation in management, although some collective labor contracts do contain provisions requiring union agreement with some decisions. 10 Notwithstanding the above, this scenario may change in the near future due to constitutional reforms on energy fields recently enacted and from which secondary laws are in process of discussion. Profit sharing Since 1963 practically all businesses with employees, whether organized as sole proprietorships, partnerships or corporations, have been required to distribute a portion of annual profits among all employees, except the principal director. The employees’ right to share in the profits of a concern does not give them the right to intervene in the administration of the concern.

Calculation of amount of profit sharing payable Employees are entitled to receive as their share of their employer’s profits an amount equal to 10% of adjusted taxable income, initially determined in accordance with the income tax law, with some adjustments. This is applicable in all cases, except for isolated situations, referred to below, in which the labor law establishes a limitation equal to one month’s salary. The base for profit sharing (adjusted taxable income) is defined in the current income tax law, as discussed in Appendix III. In cases where a net taxable income figure is not computed for income tax purposes (e.g., special regime), taxable income for profit sharing will be the theoretical profit that corresponds to the tax paid by such businesses. In the case of entities organized as a Sociedad Civil, whose income is derived exclusively from personal services, such as professional partnerships, the amount of profit sharing for each employee may not exceed one month’s salary. The same limitation applies in the case of companies exclusively devoted to collecting loans and interest thereon or management of rental property.

Doing Business in Mexico 2015 85 Method of distribution Distribution of the employees’ share in the profits must be made within five months after the year-end. The employer is required to make a copy of the company’s tax return available to the employees so that they may exercise their right to object. Any objection by employees to the tax return is communicated to the Revenue authorities, which make the final decision; this cannot be contested by the employees. In practice, only a relatively small number of objections are made by employees. However, labor law provides that non-compliance with the provisions of the law establishing profit sharing is grounds for a valid strike. The portion of the company’s profit that is distributed among its employees is divided into two equal parts, the first of which is distributed among the employees in accordance with the number of days worked during the year, and the second in accordance with the salaries earned by each employee (with the exception of the principal director) and which is limited for this purpose to 120% of the salary of the highest-paid non- confidential employee.

Persons subject to or exempt from profit sharing All individuals, companies or economic units, without legal personality that have employees are required to distribute a portion of their profits to the employees. Taxpayers exempted from income tax and those with certain exemptions should determine their profit sharing without regard to these benefits. Profit sharing is not applicable to the following: • Newly established concerns during the first year, • Newly established concerns that manufacture a new product during the first two years, • Mining and similar concerns during the exploration period, • Public and private welfare institutions recognized by law, • Enterprises whose capital and gross income are less than a specified amount established by the Labor Department. Working conditions Wages and salaries Minimum daily wages are established for separate regions of the country by a National Minimum Wage Committee, working through local committees made up of representatives of government, organized labor and private industry. Formerly, new minimum wages were approved every year, but in the past, as a result of the relatively high rate of inflation, on occasion minimum wages were adjusted more than once a year. In recent years the annual increases have not exceeded the inflation rates as measured by the National Consumer Price Index. The variation in wage rates in the different regions has been considerably reduced, and only two different minimum rates are now in effect, varying from a low of 63.77 pesos per day in some regions to 67.29 pesos per day in Mexico City and in some regions near the U.S. border. The Minimum Wage Committees have also established professional minimum wage rates for a number of semiskilled and skilled jobs and office jobs. The committee for Mexico City fixed rates for a total of 59 different positions for 2014, including, for example, those shown in Table VII.

86 Tax and Legal Services - PwC Mexico VII—Examples of Professional Daily Minimum Wages, 2014 (all amounts are in Mexican Pesos and applicable in Mexico City)

Bricklayer 98.05

Truck driver 100.35

Drugstore clerk 85.33

Blacksmith 94.46

Cashier 86.99

Shoe maker 88.06

Overtime pay and other required payments Double time must be paid for the first nine hours of overtime each week and triple pay if unusual circumstances require more than nine extra hours (the legal maximum) in any week. Triple pay is also provided for work on the seven legal holidays. Sunday work entitles a worker to a premium of 25% of regular pay, even if the worker receives a day 10 off during the week. A Christmas bonus equivalent to 15 days’ pay must be paid to all employees on or before December 20 each year. Fringe benefits Collective labor contracts often provide for benefits over and above those stipulated by the federal labor law and other legislation with regard to early retirement, number of holidays, length of vacations, and a wide range of benefits that are not taxable to employees, such as contributions to general savings funds. Many taxpayers grant coupons for meals and groceries, which under certain conditions are not taxable to the employees. From 2014, the referred to coupons will only be partially deductible for the employer in most cases. Some contracts still oblige the employer to pay the employees’ part of the social security contributions or even the personal income tax, although the latter does not represent deductible expenses for the employer and is infrequent. Many companies provide major medical and group life insurance, particularly for white-collar employees and executives. However, the provisions of the income tax law described in Chapter 15 should be reviewed before benefits are granted to only part of a company’s workforce. Fringe benefits, including labor law benefits, are significant relative to total payroll costs. Hours worked The maximum work week is six eight-hour shifts, although in practice a 40-hour week is often in effect, particularly in offices. Regular time for the night shift is seven hours and for a split shift seven and one-half hours. Paid holidays and vacations The legal holidays are listed in Chapter 1 under “Hints for the business visitor;” four or five more are often granted to office employees and under collective labor contracts. The present law requires that a vacation of six working days be granted after the first year of service, with an additional two days for each of the next three subsequent years, with an

Doing Business in Mexico 2015 87 additional two days for every five years of service after the fourth year. A premium of 25% of the regular salary must also be paid during vacations. Non-union employees are commonly granted a two-week vacation period. Equal opportunities Workers are categorized as unionized and non-unionized employees. In the case of entities with no unions, the distinction commonly made is between confidential employees (those conducting managerial activities, as discussed above) and regular employees. Under the Mexican Constitution no individual may be discriminated against on the basis of race, religion or sex. However, employers have traditionally enjoyed the liberty to hire or dismiss confidential employees at their discretion, and, in the case of unionized employees, companies commonly fill vacancies in accordance with the collective labor contract but can also hire and dismiss unionized employees as required (however, see “Termination of employment” below). Health and safety All employers must meet minimum health and safety requirements on their premises. For this purpose the labor law provides for the formation of health and security committees made up of members of management and the workforce. The committees, together with labor authorities, have the responsibility to analyze and investigate causes of work-related accidents and illnesses and to develop safety practices and procedures, to communicate them and to oversee compliance. Both the Social Security and the labor authorities are empowered to issue safety regulations and to inspect the employers’ premises in order to evaluate compliance with minimum work safety standards and special standards developed in accordance with the type of industry or activity and to impose sanctions for non-compliance. Further, Mexican Federal Labor Law provides that all business activities and ventures have the obligation to create five employer-employee committees so as to regulate and control the labor conditions of the labor relationship. These committees consist of a mixed number of members from the workforce and management and are as follows: a. Security and Hygiene Committee. b. Training and Teaching Committee. c. Committee in charge of drafting the Internal Labor Regulations. d. Committee in charge of elaborating the Seniority Chart. e. Committee in charge of elaborating the Profit sharing project. Termination of employment An employer in Mexico may dismiss an employee without liability other than the seniority premium referred to below only if there is a cause for the dismissal. The Federal Labor Law enumerates specific kinds of conduct that are cause for dismissal: [1] use of false documentation to secure employment; [2] dishonest or violent behavior on the job; [3] dishonest or violent behavior against co-workers that disrupts work discipline; [4] threatening, insulting, or abusing the employer or his or her family, unless provoked or acting in self-defense; [5] intentionally damaging the employer’s property; [6] negligently causing serious damage to the employer’s property; [7] carelessly threatening work-place safety; [8] immoral behavior in the workplace; [9] disclosure of trade secrets or confidential information; [10] more than three unjustified absences in a thirty-day period; [11] disobeying the employer without justification; [12] failure to

88 Tax and Legal Services - PwC Mexico follow safety procedures; [13] reporting to work under the influence of alcohol or non-prescription drugs; [14] a prison sentence; or [15] commission of other acts of similar severity to those described above. An employee may appeal his or her discharge within two months of the dismissal to the Conciliation and Arbitration Board, an administrative agency charged with resolving labor disputes. The employer has the burden of showing that the employee engaged in conduct described above. If the employer fails to meet this burden, the employee can request either [1] reinstatement to his or her position, or [2] a constitutional indemnification equivalent to three months full salary, including premiums, bonuses, commissions, etc., and any fringe benefits. In order to avoid such reinstatement employers usually pay the severance compensation discussed below. The employee also has the right to receive back pay with no offset for interim earnings. The labor law specifies that at the date of termination of employment, the reasons for dismissal must be presented to the employee in writing. It also provides that those employees with more than 20 years’ service can be separated only for very serious cause. The right to reinstatement is not applicable in the cases of certain employees, such as those considered as occupying positions of trust or who have less than one year of 10 service with the company. Severance compensation in these cases may be payable at the rate of three months’ salary plus 20 days’ wages for each year of service if the work contract is for an indefinite period (otherwise, the amount is different), and it may include payment of salary from the date of unjustified dismissal to the day on which these indemnities are paid. In practice, a similar amount is often paid to unsatisfactory employees as a bonus in exchange for voluntary resignation.

Seniority premiums Permanent employees are granted the right, under the 1970 law and currently ratified in the reforms to this law effective from November 30, 2012, to receive seniority premiums equal to 12 days’ salary for each year of service when separated with or without just cause. Such compensation is also payable upon the death of an employee to his or her beneficiaries. To compute such compensation the daily salary may not be less than the legal minimum wage; the maximum daily salary for this purpose is twice the minimum wage. The seniority premiums are also payable to employees who retire voluntarily if they have at least 15 years of service with the employer. If voluntary retirements exceed 10% of the total number of employees in any year, the company may defer payment of the excess until the following year. The law states that this special compensation based on length of service is payable to employees or their beneficiaries regardless of any other benefits to which they may be entitled. Decisions of the Supreme Court have established firm precedents for interpreting the provisions of the labor law for calculating the premiums in the following situations. 1. Voluntary retirement: The right to the premium is vested on employees once they have completed a minimum of 15 years of service, including the years prior to May 1970, and the premium should be paid for the entire period. 2. Death: The premium is payable to the heirs of an employee who dies from whatever cause, regardless of the number of years of employment by the company. Service prior to 1970 must be included in calculating the premium.

Doing Business in Mexico 2015 89 3. Separation for any other reason: A minimum number of years of service with a company is not required, but the premiums will be payable only for the period after May 1970. Reserves for termination pay It is now clear that in most cases (except voluntary retirements of employees with less than 15 years’ service) employers must pay seniority premiums to their employees when they leave, probably covering their entire period of employment. Accordingly, most Mexican companies will find it necessary to record provisions for seniority premiums currently in order to be able to present their financial statements in accordance with Mexican financial reporting standards, although provisions for such reserves are not deductible for tax purposes, unless funded as described for pension funds below. In accordance with financial reporting standards, companies should set up a reserve for other severance compensation that might be payable to all employees, based on actuarial studies. Pensions The average age of employees of most companies in Mexico is relatively low, particularly in the case of new companies and those that have expanded recently, and pension plans have not yet become a major factor in obtaining or retaining employees. Nevertheless, old age is not considered a justifiable cause for dismissal, and many companies follow the practice of paying full severance benefits to employees who reach retirement age. As noted below, favorable tax treatment is accorded to funded pension plans, but, perhaps because of the high level of interest rates for loan funds, few companies have as yet been willing to tie up capital in pension funds to cover the needs of the rather distant future. In these circumstances Mexican insurance companies have been offering insured plans that also provide cash surrender values available for indemnities to employees dismissed before reaching retirement age. Premiums for this type of insurance are high, but if the plan covers all or major groups of employees, the premiums are deductible for income tax purposes with certain requirements and limitations established as from 2014. See Chapter 15 and 16. Estimated provisions are not deductible for income tax purposes. However, contributions to a funded pension plan may be deductible if certain requirements are fulfilled. The principal ones are that the funds must be invested through an irrevocable trust in securities approved by the National Securities Commission or in houses to workers, with 30% in government securities; contributions to the fund must be based on a report of a Mexican actuary and the plan must cover all employees. Foreign workers If any foreign national performs professional activities on Mexican territory, he must obtain a working visa, issued by the Mexican Immigration Authorities. Depending on the foreigner’s activities, it will be necessary to carry out a specific procedure with the Immigration Authorities. The Mexican Labor Law establishes that in all companies 90% of employees should be Mexican citizens. In consequence only 10% of foreigners may be employed in Mexican companies. This rule is not applicable to foreign nationals employed as Directors, Administrators and General Managers in Mexico.

90 Tax and Legal Services - PwC Mexico Social security Social security system The Mexican Social Security Institute (IMSS) was established in 1942, and the social security system is in effect in all industrial areas and agricultural zones throughout Mexico. In these areas the employer’s statutory obligations in connection with occupational risks are covered by payments of social security premiums. The Institute provides for employees’ and their dependents’ medical attention, including hospitalization, and limited unemployment compensation in cases of illness and maternity, occupational disease and accidents, in addition to disability and old-age pensions. A separate social security system operates for employees of the government and its agencies. Coverage The IMSS system is mandatory in regard to all non-government employees throughout the country. Special rules cover self-employed persons, domestic servants and some others. All employers having at least one employee, including non-profit institutions and others that might be tax exempt, are required to register with the IMSS and pay its premiums. Foreign employees of Mexican companies working in Mexico are subject to 10 the social security system on an obligatory basis. Contributions Social security contributions/premiums are incurred by both the employer and the employee (through withholding) and remitted to the social security authorities every month. Premiums are determined as a percentage of each employee’s wages, and the computation differs depending on the following categories. • Sickness and maternity. • Life and disability. • Day-care centers and social benefits. • Retirement Savings System (SAR) and old age. • Occupational risks. The percentage contributions for each category (except for occupational risks) and maximum contributions are shown in Appendix XI. The premium for occupational risks, paid entirely by the employer, is a percentage of the total earnings base. The applicable percentage varies, depending on the risk class to which a company is assigned. Table VIII shows the average percentage applicable to each risk class in the case of a newly incorporated entity. All employees of a company located in the same city or other social security jurisdiction are classified in the same group, regardless of the type of work each performs. The percentages shown can be lowered or raised somewhat, depending on the safety equipment installed and the actual frequency and costs of claims made by the employees of a particular company (actual experience). In the second month of the year the corresponding percentage rates will be self- determined, based on prescribed procedures and according to actual experience under the regulations of the Social Security law.

Doing Business in Mexico 2015 91 Employers are also required to pay 1% of covered payrolls as an additional premium to cover the cost of maintaining day-care centers for children of working mothers and social benefits. On the basis of the above percentages and those described in Appendix XI, in 2009 a company classified in risk class III, paying just minimum salaries, would currently incur social security premiums, including SAR, aggregating approximately 34.59% of its total payroll for the first year. Other cases would be subject to the wage ceiling computations in Appendix XI.

VIII—Premiums for Occupational Risks

Average Risk Includes additional Class percentages*

Commerce, the professions, administrative or sales offices I 0.54355 (see below)

Some commerce, warehouses, very light manufacturing, II 1.13065 laboratories

III Light, manufacturing, textiles, etc. 2.5984

IV High-risk industry using metals, chemicals, heat 4.65325

Maximum risk, including construction, mining, heavy V 7.58875 industry

*These percentages may decrease or increase 1 percentage point (from 0.50 to 15 percentage points) in subsequent years.

Benefits Sickness and disability The Social Security Institute provides medical and hospital service throughout the country, alongside private hospitals and many physicians in private practice. It maintains modern hospitals and clinics to give medical attention to covered employees and provides without charge medicines, etc., prescribed by its doctors. If employees are absent from work for more than three days as a result of a non-professional illness, job-related accident or illness or maternity, the Institute will pay 60 to 100% of their regular salary during their absence; the employer is relieved of the obligation to pay the salary, although in some cases employers pay the difference. A guaranteed minimum salary is payable in the case of permanent disability, and benefits to heirs are provided in case of death.

92 Tax and Legal Services - PwC Mexico Pensions Old-age pensions, as well as those for disability, have been increased in recent years. The pensions are normally payable from age 65 if the person has paid social security premiums for the required minimum of 1,250 weeks. Early retirement at reduced rates of pension can be taken from age 60. There are minimum guaranty pensions equal to the monthly minimum salaries. Currently employees can qualify for one of two different pensions. Employees who began working after July 1, 1997 receive their pension through AFORE; employees who started working before that date can receive their pensions through AFORE or through the traditional system. Retirement Savings System (SAR) and Old Age In order to supplement retirement pensions under the regular social security system, which have been deemed insufficient to provide adequate retirement benefits, a Retirement Savings System is established. The employer’s contribution per employee is 2% of salary, with a wage ceiling of 25 times the minimum wage for Mexico City. The Old Age system includes an additional contribution per employee of 3.15% of salary. These employer contributions will be credited to individual employees’ restricted interest-bearing bank accounts established specifically for this purpose. The funds so 10 accumulated over the years may be withdrawn, under certain rules, only upon retirement or unemployment due to disability and will be partially or totally exempt upon withdrawal, together with any other retirement payments received from the employer, following the general rule for taxation of pensions payments (i.e., pensions are taxable only to the extent that they exceed nine times the minimum wage). Employees may elect a company authorized to manage the fund (Individual account) for the Retirement Savings System (Administradora de Fondos para el Retiro—AFORE). Totalization agreements Except for Spain and Canada, Mexico has not subscribed to totalization agreements with other countries. Additionally, whenever an employer sends an employee overseas (for training, exchange programs, scholarship programs, etc.), the Mexican employer is still required to cover the assignees’ medical expenses and to not suspend them from any pension or other benefit programs in which they have a vested right.

Housing On May 1, 1972 the National Workers’ Housing Fund Institute (INFONAVIT) was inaugurated under the terms of amendments to the federal labor law and a law establishing the Institute. Obligations of employers The Mexican Constitution provides that all agricultural, industrial, mining, and other enterprises of whatever nature are required to provide adequate housing for their employees; this obligation must be fulfilled by means of contributions in the name of the individual employee. In accordance with the law, employers are required to contribute to the Institute amounts equal to 5% of the earnings of their employees, calculated on the same basis as for social security purposes. Foreign employees of Mexican companies working in Mexico are also entitled to the housing contributions.

Doing Business in Mexico 2015 93 The contributions paid by employers represent social welfare benefits (previsión social). Accordingly, they are deductible expenses for income tax purposes of the employers. In accordance with Article 36 of the law establishing the Institute, deposits in the names of employees are exempt from all taxation. Employers are required to register themselves and their employees with the Institute under rules issued by the latter. The mechanics to provide housing consists in granting loans to employees through specific selection procedures in order that they can acquire a home. Employers are also responsible for making such deductions from the salaries of employees who receive housing loans, including those earning minimum wages, as may be required by the Institute to repay the loans. Enterprises must pay the 5% contribution in respect of all employees as long as they are employed, even if they have already received a loan from the Institute or if they reside in quarters rented to them by the employer. Benefits to employees The entire amount of the 5% housing contribution for each employee is deposited in an interest-bearing bank account in the employee’s name. Employees have the following rights. 1. The employee may use these funds to build, buy or repair a home or to repay an existing debt incurred for such purposes. 2. The entire net balance accumulated in the name of an employee (after deducting amounts so utilized) will be paid to the employee in the case of total disability or retirement or to the employee’s heirs upon death. National Workers’ Housing Fund Institute (INFONAVIT) INFONAVIT was established as an independent social service organization with legal personality and control of its own assets. Control of the Institute is vested in a general assembly of 45 members, 15 named by the executive branch of the federal government, 15 by national labor organizations and 15 by national employers’ organizations. In addition to having full authority over the policies and operations of INFONAVIT, the general assembly also elects the board of directors, consisting of five members, each representing government, labor and employers, and the general director, who is proposed by the .

94 Tax and Legal Services - PwC Mexico Chapter 11 Audit requirements and practices

Investor considerations • Statutory audits are required for all private Mexican corporations. In public listed companies, this function is performed by the Audit Committee. • Larger companies are required to file tax compliance audit reports electronically with the tax authorities. • Accounting profession is mature and well organized. • International Standards on Auditing are mandatory as of January 1, 2013, leaving the Generally Accepted Auditing Standards (GAAS) in Mexico without effect. • Stringent electronic reporting requirements apply in Mexico.

Statutory requirements 11 Books and records Loose-leaf or any other type of auxiliary records may be maintained. Such principal and auxiliary records as may be necessary to record clearly the transactions of the company must be written up in pesos and in the and must be kept at the official domicile of the company, but there is no prohibition against records also being expressed in another currency or language. These requirements apply to all businesses described in Chapter 9. By law, all fiscal years must coincide with the calendar year. Electronic Reporting Requirements The Mexican Tax Law contains rules concerning the delivery of accounting records (e.g., trial balance, etc.) via electronic media on a monthly basis when law takes full effect. However, it will include information as from July 2014. There are specified deadlines for the delivery of trial balances and the catalog/charts of accounts using the XML file format. The authorities may also request information on the accounting journal entries and other records. The provision applicable to the financial sector, has it is own set of rules. In addition, invoices issued and received, and individual payroll receipts must generally be on officially authorized printed forms. Moreover, the issuer of the invoice is generally required to provide a digital tax invoice to the tax authority and the customer as well as employees via electronic means using the XML file format (Comprobante Fiscal Digital através de Internet – CFDI).

Doing Business in Mexico 2015 95 CFDI allows taxpayers to use the strongest technical and legal infrastructure, and thus brings full safety for e-Invoicing. Finally, most official notifications and communications between the tax authorities and the tax payers are now done via a digital tax inbox (buzón tributario). Audited financial statements Corporate reviewer (“Comisario”) All private companies governed under the General Law of Commercial Companies need to appoint one or more Corporate reviewers, sometimes also known as Statutory Auditors, on a temporary and revocable basis, who may be owners or people outside of the company. The Statutory Auditor should be elected by the shareholders at the General Meeting and cannot be ineligible to conduct business; nor can the external auditor be an employee of the company or the employees of those companies if they own more than 25% of the share capital, and cannot be employees of companies that are more than 50% owned by such company or direct blood relatives of the the management. Statutory Auditors must attend meetings of the Directors and has the right to be heard but does not have the right to vote; the external auditor is required to inform shareholders on matters pertaining to the annual financial statements; and can call ordinary and extraordinary shareholders’ meetings. The report of the Statutory Auditors must include at least (1) the opinion on whether the accounting policies, criteria and the information used by the company are adequate, taking into account the particular circumstances of the company; (2) an opinion on whether those policies and criteria have been applied consistently to the information presented by management; and (3) an opinion on whether, as a result of the foregoing, the information presented by management fairly and sufficiently reflects the financial position and results of the company. Companies listed on the Mexican Stock Exchange are exempt from appointing Statutory Auditors since the Audit Committee is the body who performs those functions. Independent Auditor When a company has independent auditors, a member of the auditing firm frequently serves as Statutory Auditor. This is very common in the case of subsidiaries of foreign companies. In other cases, Statutory Auditors who are not members of the auditing firm frequently cite the independent auditors’ reports as the basis of their reports. When public accountants are appointed as statutory auditors, they usually insist on carrying out a normal audit in accordance with) International Auditing Standards (IAS) rules or GAAS as described below, although this is not specifically required. In general, local as well as foreign banks, are requesting audited financial statements more frequently as a normal requirement before granting substantial lines of credit, with the result that full-scope examinations by independent auditors are becoming increasingly common. Business taxpayers meeting certain size criteria (see Chapter 14) or belonging to a group that as a whole meets these criteria must file a tax-compliance audit report every year with the Federal Tax Audit Department, a dependency of the Ministry of Finance. This report consists of audited financial statements and detailed additional schedules, together with a report by the auditor stating that no irregularities were observed in respect of the taxpayer’s compliance with its federal tax liabilities. These reports must be filed electronically. The auditor for this purpose must be a Mexican public accountant

96 Tax and Legal Services - PwC Mexico registered with the tax authorities. When the company has independent auditors, a member of the auditing firm usually renders this service. From 2008 awards, the amount of detailed information to be filed, and the auditor´s responsibility in connection therewith, have been increased significantly. The independents auditors’ tax report is now optional for most companies, but the Federal Tax Audit Department reviews the additional information now required for taxpayers electing out of the tax report, as discussed below. Until December 31, 2013, individuals and corporations in Mexico generally had an obligation to have their financial statements audited for tax compliance purposes, for which the Fiscal Code of the Federation (CFF by its Spanish acronym) and its Regulations (RCFF by its Spanish acronym) on the opinion on financial statements stipulated the legal framework in which the audit would be carried out. As of January 1, 2014 the requirement to submit an opinion on the financial statements for tax purposes is repealed for those taxpayers who in the immediately preceding year had obtained taxable income up to $40,000,000 and they may choose not to submit the opinion provided that the value of their assets or number of employees does not exceed 300 the amounts referred to In Article 32 A, Section I of the CFF. Where in the immediately preceding financial year they had obtained taxable income higher than $ 40,000,000 or the value of its assets or the number of workers exceeds the amounts referred above and the taxpayers that in accordance to the Article 16 of the Social 11 Security Act, are required to audit the performance of its obligations to the Mexican Institute of Social Security, by certified public accountant, they may choose not to obtain and submit the opinions relating to the Mexican Institute of Social Security, provided they submit the information within the time and means that, by general rules, are established by the appropriate taxing authorities. According to the Mexican Market Value Law all companies listed on the Mexican Stock Exchange are required to submit annual consolidated financial statements with the opinion of a Mexican public accountant. Commencing in the year ending December 31, 2012, these financial statements must be prepared in conformity with International Financial Reporting Standards (IFRS) and cover three years. In addition, financial institutions and insurance companies must file audited financial statements with the appropriate regulatory agency. PricewaterhouseCoopers’ (PwC) highly trained staffs is in a position to render any or all of the audit services described above and to assist investors in every phase of the establishment and operation of a business enterprise in Mexico (see Chapter 24). Accounting profession The Mexican accounting profession is mature, independent, well organized, and well regarded by the business community. Its governing body is the Mexican Institute of Public Accountants (IMCP), which is a federation of the state and other local associations of registered public accountants. The title of public accountant (contador público) is a degree conferred by Mexican universities on graduates who have completed the required four to five years of specialized college-level studies and certain other requirements. The degree, which entitles the public accountant to use the initials C.P. before his or her name, must be registered at the licensing office (Dirección General de Profesiones) of the federal Ministry of Education if the C.P. wishes to have the right to practice as such. In order to

Doing Business in Mexico 2015 97 practice before the tax authorities, accountants must also be members of their local association of public accountants. In addition, the IMCP issues Professional Certificates to C.P.s meeting certain experience and continuing education requirements, entitling them to use the designation C.P.C. (Contador Público Certificado). Nowadays, the total membership is over 20,000, of who the majority are in public practice. Mexican public accounting firms vary in size from the offices of individual practitioners to firms with professional staffs of well over 1,000, one-half of whom on average are public accountants. All of the national firms in the United States have arrangements with associated firms in Mexico or are represented by Mexican firms. Many other U.S. and foreign firms are also represented on a permanent basis by local public accountants. The larger firms provide nearly the same range of services as in the United States and other industrialized countries, including specialized tax services and management advisory services, and they usually have offices in several Mexican cities. Some of the smaller firms specialize in bookkeeping work for numerous clients. The Mexican Institute of Public Accountants is an independent non-governmental professional association, representing the overwhelming majority of public accountants. Through its standing committees the IMCP formulates auditing standards and rules of ethics for Mexico. Until May 31, 2004, the Institute also formulated accounting principles for Mexico. However, on June 1, 2004, this responsibility was taken over by the Mexican Financial Reporting Standards Board (CINIF, for its initials in Spanish, for more information see Chapter 12). CINIF has been responsible for the development of Mexican Financial Reporting Standards (MFRS) to achieve convergence between International Financial Reporting Standards (IFRS). In May 2005, it ratified the decision to change the name of Generally Accepted Accounting Principles (GAAP) to MFRS. Although the Institute does not maintain a large permanent staff and works through the members of the profession who serve as its officers and on its committees, it has been very active in the preparation of statements formalizing NIF. The IMCP was a founding member of the International Accounting Standards Committee, which has now been replaced by the International Accounting Standards Board. Auditing standards As of January 1, 2012, the international auditing standards are used mandatorily in reviews by auditors in Mexico. (Illustrative report template in use in Mexico is included in Appendix X). Proposed changes to the IAASB audit opinion The International Standards on Auditing have been commonly used in various countries, however, on July 25, 2013, the International Auditing and Assurance Standards Board (IAASB) issued an exposure draft (ED) Reporting on Audited Financial Statements: Proposed New and Revised International Standards on Auditing (the proposed ISAs) intended to enhance the future auditor’s report by increasing its communicative value to users.

98 Tax and Legal Services - PwC Mexico The proposed ISAs would require disclosures about key audit matters (KAM) and the engagement partner’s name in audit reports for listed entities, and statements about going concern and other information, among other matters, in all audits conducted in accordance with International Standards on Auditing (ISAs). Communicating Key Audit Matters (KAM) in the Independent Auditor’s Report would require auditors of financial statements of listed entities to communicate in a separate section of their report those matters that, in the auditor’s professional judgment, were of most significance in the audit of the financial statements of the current period. KAM are selected from matters communicated with those charged with governance. In determining which of the matters communicated to those charged with governance are KAM, the auditor should take into account areas of significant auditor attention in performing the audit, including: a. Areas identified as significant risks or involving significant auditor judgment. b. Areas in which the auditor encountered significant difficulty during the audit, including with respect to obtaining sufficient appropriate audit evidence. c. Circumstances that required significant modification of the auditor’s planned approach to the audit, including as a result of the identification of a significant deficiency in internal control.

Going concern A new “going concern” section of the auditor’s report would be required which addresses the auditor’s conclusions related to whether management’s use of the going concern basis of accounting in the preparation of the financial statements is appropriate, and whether a material uncertainty exists related to events or conditions that, individually or collectively, may cast significant doubt on the entity’s ability to continue as a going concern. If the auditor’s report states that the auditor has not identified a material uncertainty, a statement that neither management nor the auditor can guarantee the entity’s ability to continue as a going concern should also be included. Other proposals Other provisions of the proposed ISAs would require the auditor’s report to include, among other matters, the following information: • Disclosure of the engagement partner’s name (only for audits of listed entities). • A statement that the auditor is independent of the entity within the meaning of the relevant ethical requirements or applicable law or regulation and has fulfilled the auditor’s other responsibilities under those requirements. • Reporting on the auditor’s responsibilities with respect to other information. • An enhanced description of the auditor’s responsibilities.

Doing Business in Mexico 2015 99 100 Tax and Legal Services - PwC Mexico Chapter 12 Accounting principles and practices

Investor considerations • Basic financial statements usually cover two years. • In general, conformity between accounting and tax treatment of income and expense items is not required. • Until December 31, 2007, financial statements had to be comprehensively restated to reflect the effects of inflation. • The objective of the Mexican Financial Reporting Standards is to have convergence with International Financial Reporting Standards. • Public companies transitioning to IFRS.

Accounting principles Beginning June 1, 2004, the Mexican Financial Reporting Standards Board (CINIF, for its initials in Spanish), assumed the responsibility for setting accounting and reporting standards in Mexico. In compliance with this responsibility and after due 12 exposures, the CINIF has issued a large number of Mexican Financial Reporting Standards (MFRS). The main objective of the MFRS is to achieve the maximum possible harmonization and convergence of Mexican accounting and reporting standards and regulatory practices with International Financial Reporting Standards (IFRS). The full hierarchy of the MFRS, in effect beginning January 1, 2006, is as follows: • MFRS and Interpretations of MFRS issued by the CINIF. • Statements issued by the Accounting Principles Board of the IMCP that have not been amended, replaced or repealed by the new MFRS. • IFRS, when no applicable Mexican standard exists. Commencing with the year ending December 31, 2012, all Mexican public companies will be required to file their audited financial statements of the last three years, according to the Mexican Stock Exchange rules. MFRS make no distinction between large and small companies with respect either to the standards themselves or to disclosure requirements. Statements issued by the CINIF and the IMCP are applicable to all business entities. However, the National Banking and Securities Commission (Comisión Nacional Bancaria y de Valores—CNBV) sometimes issues specific rules for companies listed on the Mexican Stock Exchange. These rules, whose

Doing Business in Mexico 2015 101 purpose is to ensure greater comparability among the financial statements of listed companies, either eliminate certain options available under Mexican Financial Reporting Standards or require that all listed companies adopt a newly promulgated reporting standard in the same calendar year. The IMCP is a member of the International Accounting Standards Committee (IASC), and MFRS are generally in compliance with IASC and IFRS standards. IFRS must be applied in Mexico in areas not covered by existing Mexican accounting standards. Financial institutions, stockbrokers and insurance companies are required to prepare their financial statements in accordance with accounting practices prescribed by the appropriate regulatory agency. These practices differ in some respects from MFRS. Mexican Financial Reporting Standards issued by the CINIF and Changes in Mexican Financial Reporting Standards and Improvements to MFRS 2014 are observed in Appendix X.

Form and content of financial statements The following basic financial statements, usually covering two years, are included with reports of public accountants. • Statement of the Financial Position • Comprehensive Statement income (presentation on a single financial statement) or integrated Statements of Income and Other Comprehensive Income (presentation in two statements). • Statement of changes in stockholders’ equity. • Statement of cash flows. • Notes A typical set of financial statements for a subsidiary of a foreign company is included in Appendix XIII. Mexican company law requires that the above statements and notes, together with the statutory auditor’s report (in the case of a private company) and management’s report on the company’s operations, be presented at the annual stockholders’ meeting. In the case of a listed company, the independent auditors’ report and the report of the Audit Committee would be presented instead of the statutory auditor’s report. Each stockholder has the right to receive a copy. Listed companies must publish their annual financial statements and notes, but not management’s report on operations, in a major newspaper. However, unlisted companies are not required to publish their financial statements or otherwise make them available for public inspection. Income statement The comprehensive statement income should show at a minimum, if applicable, the line items of net sales or revenues, costs and expenses, comprehensive financing result, income taxes, discontinued operations and other comprehensive net income.

102 Tax and Legal Services - PwC Mexico Accounting for inflation Until December 31, 2007, because of severe inflation in Mexico in earlier years, all primary financial statements had to be restated to show the effects of inflation. A summary of the procedures applied follows. • Inventories, fixed assets and other non-monetary assets, accumulated depreciation, depreciation for the year, and cost of sales were normally restated by applying general price indexes. However, inventories and cost of sales could also be restated by determining current replacement cost and imported fixed assets could be restated by the “specific indexation” method (see “Property, plant and equipment” below). • All components of stockholders’ equity were restated by applying general price indexes. • The gain or loss on net monetary position and all exchange differences were included in income. Together with interest, they were grouped under the heading “comprehensive financing income (expense)” (resultado integral de financiamiento). • All financial statements had to be stated in “constant” pesos of purchasing power as of the date of the latest balance sheet presented. This meant that all current-year income statement items, all prior-year financial statements presented for comparative purposes and all footnote information had to be restated by using factors derived from the National Consumer Price Index (NCPI). The statement of changes in financial position (now replaced by the statement of cash flows) was similarly presented in constant pesos, which meant that the resulting “cash flows” did not represent cash flows as understood in the context of historical-cost accounting but rather flows of 12 units of constant purchasing power. • Companies using replacement cost to restate inventories or cost of sales or the “specific indexation” method to restate imported fixed assets (rather than indexed historical cost) had also to determine the gain or loss from holding non-monetary assets, which was equal to the amount by which such restated values exceeded or fell short of the value determined using general price indexes. This gain or loss was included directly in stockholders’ equity. • Commencing January 1, 2008, the effects of inflation should not be recognized unless the cumulative inflation of the three preceding years exceeds 26%. This was not the case in 2008 and is not expected to be the case in the foreseeable future. Consequently, transactions occurring from 2008 onwards are accounted for at historical cost. However, the cumulative effects of inflation included in non-monetary assets and stockholders’ equity at December 31, 2007 were not reversed, so that from 2008 onwards these items are recorded on a mixed basis; that is, items originating prior to December 31, 2007, were inflation-adjusted through that date, and subsequent additions were recorded at historical cost. At December 31, 2013, the restatement effects on the financial statements are not representative, except for non-monetary items in force with aging greater than 7 years and the updating effects in Stockholders’ Equity recognized through December 31, 2007 Capital As explained in the previous section, all components of stockholders’ equity were restated for inflation through December 31, 2007, by applying factors derived from the NCPI to the historical balances. Subsequent movements are recorded at historical cost.

Doing Business in Mexico 2015 103 Capital stock is shown at par or stated value, partially restated as indicated above. Any excess is shown separately as a premium on issuance of capital stock. Additional contributions by stockholders are usually shown as such. Treasury shares are shown as a deduction from capital stock in the consolidated balance sheet. Stock dividends paid are recorded by transferring the appropriate amounts from retained earnings to capital stock (and possibly premium on issuance of capital stock). Stock splits would not affect the amount of capital stock. No value is attributed to shares authorized but unissued.

Revelant aspects in Financial Reporting Some important aspects according to Mexican Financial Reporting Standards are shown below:

Marketable securities Marketable securities held as temporary investments are stated at market value and gains or losses on valuation are included in income.

Long-term investments These investments, comprising investments in debt and capital securities, are classified in the following categories in accordance with management’s intention at the date of acquisition: investments to be held to maturity, financial instruments held for trading, and financial instruments available for sale. They are initially stated at acquisition cost and are subsequently stated as described below: (i) Debt securities to be held to maturity are stated at acquisition cost reduced by amortization of premiums or increased by amortization of discounts, as applicable. Any permanent decrease in value is recognized when appropriate, with charge to income. (ii) Financial instruments held for trading and those available for sale are stated at fair value, which is similar to market value. Changes in the fair value of financial instruments held for trading are charged or credited directly to income. Changes in the fair value of financial instruments available for sale are included in stockholders equity as part of comprehensive income until the instruments are sold or reclassified, at which time amounts included in comprehensive income are transferred to income for the year.

Inventories Inventories should be valued at the lesser cost of the cost or net realizable value.

Property, plant and equipment Property, plant and equipment are carried at partially restated cost less accumulated depreciation (except that land is not depreciated). Cost includes the comprehensive financing cost (see “Accounting for inflation”) incurred during the construction or installation period. As explained under “Accounting for inflation”, until December 31, 2007, all property, plant and equipment were restated for inflation. Assets of Mexican and foreign origin were restated by applying factors derived from the NCPI to their cost or their appraisal value at December 31, 1996. Assets of foreign origin could optionally be restated by applying factors derived from the general inflation index of the country of origin to the assets’ cost expressed in the corresponding foreign currency and translating the

104 Tax and Legal Services - PwC Mexico resulting foreign currency amount to pesos at the exchange rate prevailing at the closing date. Assets acquired after December 31, 2007, are stated at historical cost. In all cases, the asset values must be reduced by accumulated depreciation, calculated on both historical cost and revaluation increments, based on realistically estimated useful lives. The depreciation of revaluation increments is not itself deductible for tax purposes; however, the tax system has its own method of indexing depreciation, and this gives approximately similar results.

Impairment In general, all long-lived assets should be tested for impairment whenever there are indications that their value may have been impaired, other than for purely temporary reasons. In addition, goodwill and intangible assets with an indefinite estimated useful life, or an original estimated useful life in excess of 20 years, must be tested for impairment at least annually, even if no indication of impairment exists. Impairment should be recognized whenever the net book value of the long-lived assets exceeds their recoverable value. The recoverable value is the higher of their estimated net realizable value and their value in use. Value in use is defined basically as the sum of the discounted future cash flows expected to be generated from the operation of the business. The amount of any impairment so determined, and also of any recovery determined in future years, should be charged, or credited, to income currently.

Depletion 12 Depletion of natural resources is based on partially restated cost, as described above. It is usually calculated at rates per number of units produced, determined at the time normal production is commenced. For tax purposes, exploration and development expenses may be written off over a ten-year period, in which case the deferred balance is adjusted for inflation.

Purchase of another business The purchase method of accounting for an acquisition is currently the only method permitted. All assets, including identifiable intangible assets, and liabilities acquired in an acquisition must be valued at fair value. Any excess of the price paid for the shares over the fair value of the net assets acquired, usually referred to as “goodwill,” should be shown in the consolidated balance sheet. Goodwill is not amortized, but is subject to annual testing for impairment. If the acquisition cost of the shares is less than the fair value of the underlying net assets (“negative goodwill”), the excess is applied to write down the value of the non-monetary assets acquired. Any remaining excess, after the non-monetary assets are reduced to zero, is carried to income in the year of acquisition. A company acquiring another business may also purchase the acquiree’s assets rather than its shares. The assets acquired would be depreciated in the normal way, based on the cost to the acquirer, for both accounting and tax purposes. The purchase of assets rather than shares may insulate the acquirer from any contingent liabilities of the acquiree, especially possible tax contingencies, but has the disadvantage for the acquiree that it would normally have to separate all its employees, paying them seniority

Doing Business in Mexico 2015 105 premiums and separation pay, unless acquirer assumes all employment obligations and maintains compensation and working conditions prevailing prior to acquisition. (See Chapter 10 regarding Employement Matters) Purchase accounting is not followed when the acquiring company and the acquiree are under common control. In these cases the net assets acquired are recorded at their book value in the acquiree, and any difference between such book value and the purchase price is treated as a contribution or distribution of stockholders’ equity.

Consolidation Except in unusual circumstances, the financial statements of companies controlled by Mexican corporations should be consolidated with those of the parent company. Control exists when an entity has power over an entity in which it participates to direct its relevant activities, is exposed or has rights, to variable returns from such participation and has the present ability to affect those returns through its power over the investee .Parent company financial statements, prepared on an unconsolidated basis, are acceptable only when prepared to comply with legal requirements, such as the report of a statutory auditor to its annual shareholders’ meeting or statements prepared for federal tax audit purposes, provided the ultimate parent company or some other higher-level intermediate parent, company present financial statements based on Mexican Financial Reporting Standards (MFRS).Investments in unconsolidated subsidiaries or associated companies of which 10 to 50% is owned by an investor company should be accounted for by the equity method, except for investments in companies in other countries subject to exchange control. The latter should be stated at the lower of cost or the equity basis. The CNBV requires that all companies listed on the Mexican Stock Exchange publish consolidated financial statements. Provisions and reserves Income tax and employees’ statutory profit sharing Employees’ profit sharing is payable on the basis of adjusted net profits (see Appendix III). The differences between accounting income and profits for profit sharing purposes are comparable, although not identical, to differences between accounting and taxable income. Mexican reporting standards require comprehensive interperiod tax allocation by the assets-and-liabilities method, similar to the current U.S. and international standards (FAS 109 and IAS 12, respectively). Under this standard a deferred tax is recognized, in principle, for all differences between the book and tax amounts of assets and liabilities. A valuation allowance should be recorded for any deferred tax asset whose realization is doubtful. Deferred employees’ profit sharing is recognized on a similar basis, to the extent that it may reasonably be assumed that such differences will give rise to an actual future benefit or liability. During the month of October 2013, the issuance of a new Income Tax Law was approved, which came into force on January 1, 2014; and the Law of Flat Tax (LIETU by its Spanish acronym) was repealed.

106 Tax and Legal Services - PwC Mexico Deferred income tax and deferred profit sharing are usually grouped together in the balance sheet. ESPS expenses, both current and deferred, are shown within operating expenses in the statement of comprehensive net income.

Valuation allowances and estimated expenses All necessary provisions for items such as bad , inventory valuation or obsolete merchandise and estimated expenses must be included in the financial statements. However, these items are not normally deductible for tax purposes until realized.

Derivative financial instruments All financial instruments are included in the balance sheet as assets or liabilities at fair value. Changes in their fair value are recognized in income as part of comprehensive financing income (expense), except when the instruments are entered into to hedge against risks and comply with all related requirements. Changes in the value of fair value hedges are recorded in income under the same caption as the hedged item. In the case of cash flow hedges, changes in the value of the effective portion are temporarily included in comprehensive income in stockholders’ equity and are reclassified to income when the hedged item affects income. Any ineffective portion is recognized immediately in income. 12 Employee pensions, seniority premiums, termination pay Provisions for employee pensions, seniority premiums, termination pay, etc., should be recorded currently, on an actuarial basis, with charge to income. The underlying accounting and disclosure rules are very similar to those in effect under U.S. generally accepted accounting principles. Until 2007 actuarial gains and losses and any transitional liability for prior service costs were amortized over the average estimated service lives of the employees. Commencing in 2008 these items are generally amortized over a maximum period of five years. Provisions for pensions, seniority premiums, etc., are deductible for tax purposes only if funded in accordance with plans approved by the Ministry of Finance (see “Pension funds” in Chapter 15).

Contingent liabilities General contingency reserves are not acceptable under NIF in Mexico. Provisions for specific contingent liabilities must be estimated and recorded whenever future payment is considered more probable than not.

Statutory reserves 5% of net profits of corporations should be set aside in a statutory (legal) reserve until the balance reaches 20% of the value of the outstanding capital stock. However, since these provisions represent appropriations of retained earnings, the balance of the reserve is shown in the stockholders’ equity section of the balance sheet.

Doing Business in Mexico 2015 107 Footnote disclosure The requirements for disclosures in footnotes are generally similar to those in effect under IFRS. They include information as to the principal accounting policies of the company, material contingencies of whatever nature, commitments for substantial purchases of assets or under lease contracts, mortgages and other charges on assets, details of long-term debt and foreign currency exposure, details of derivative financial instruments, limitations on dividends, guarantees given, employees’ pension plans, transactions with related parties, and income taxes.

Recording of income Income statements are almost universally prepared on an annual basis for presentation at shareholders’ meetings and for income tax purposes. The value-added tax law requires monthly returns of revenue. Accordingly, difficulties are sometimes encountered by companies that wish to keep their accounts on the basis of periods consisting of precisely 4, 13 or 52 weeks. Annual income tax returns must be prepared for fiscal years that end precisely on December 31. The law provides that invoices must be issued no more than 30 days after a sale is made, but accrual accounting requires that all shipments be recorded in the period in which they were made. Gross profits on installment sales are generally recognized in the period of sale, although in certain cases, particularly where collection is not assured, they are recognized as collections are made.

Book and tax differences Numerous differences between the book and tax treatment of items of income and expense may and usually do exist. The tax treatments mentioned below are discussed in more detail in Chapter 15. The more important are shown in Table IX below. It should be noted that, generally speaking, conformity between accounting and tax treatment of income and expense items is not required.

Foreign investors There are no disclosure requirements applicable exclusively to foreign investors. However, a foreign-owned subsidiary or investee company would have to comply with the disclosure requirements applicable to all entities doing business in Mexico. These include the need to disclose all significant transactions with related parties, including parent, affiliated and subsidiary companies, together with the following information. • Nature of the relationship. • Amount and description of transaction (even when no charge is made for the goods or services). • Effect of any changes in the terms of recurring transactions. • Balances with related parties and a description of any special characteristics (for example, due dates, interest rates). • Any other information considered necessary for an understanding of the transaction. Transactions of a similar nature may be grouped together. Remuneration paid to company directors, officers and executives for services rendered in such capacities and the extent of directors’ or officers’ shareholdings need not be disclosed. However, in the case of public companies, the total combined remuneration paid to directors and principal officers must be disclosed.

108 Tax and Legal Services - PwC Mexico IX—Book and Tax Differences

Item Tax treatment

Deductible at the maximum rates specified by law by the straight-line method and inflation-indexed. However, depreciation (and other operating expenses) of automobiles Depreciation is deductible only up to a certain limit (see Chapter 15). Impairment of long-lived assets is not deductible for tax purposes.

Provisions for specific estimated Only definitive amounts due to creditors may be deducted. expenses

Provisions for pensions and other Deductible only when calculated on actuarial basis and paid seniority benefits into an irrevocable trust fund.

Deductible only when practical inability to collect can be Bad debts established for each debt or the statute of limitations to demand payment has expired.

The tax system includes adjustments for inflation with respect to depreciation, gain or loss on sale of capital assets, loss carryforwards, asset tax credits, and monetary gain or loss Adjustments for inflation (componente inflacionario). As indicated in Chapter 12, until December 31, 2007 similar (but not identical) inflation 12 adjustments were recorded for accounting purposes. However, these were discontinued from January 1, 2008 onwards.

Doing Business in Mexico 2015 109 110 Tax and Legal Services - PwC Mexico Chapter 13 Tax system

Investor considerations • Resident taxpayers (corporate or individual) are subject to Mexican taxation on worldwide income. • Non-resident taxpayers (corporate or individual) are taxed on Mexican-source income only. • Corporate income is taxed at the corporate level. Beginning 2014, a 10% withholding tax is applied on dividend distributions to individuals and foreign residents (See Chapter 17). • Compulsory profit sharing, equal to 10% of taxable income as adjusted for this purpose, is payable each year to employees; and is deductible for tax purposes. • Flat Tax, which was assessed as minimum tax on enterprises, was repealed in 2014. Rights and obligations born within the repealed Law will be respected. • In general, form prevails over substance, although tax courts are increasingly basing their rulings on substance. • Thirty seven tax treaties are now in effect, and negotiations for tax treaties with other countries are in progress. • Double taxation relief is given by way of (limited) credit for 13 foreign taxes paid.

Principal taxes The principal taxes payable by commercial and industrial enterprises operating in Mexico and, in certain cases, by foreign companies and individuals, are those levied by the federal government. State and municipal governments have more limited tax powers and also receive allocations of some federal taxes collected within their borders. The principal taxes are as follows. 1. Federal taxes: a. Income tax; b. Value-added tax; d. Custom duties; f. Payroll taxes, mainly social security. e. Excise taxes on oil and gas production and on the extraction of mineral resources, as well as on some consumer goods (liquor and tobacco) and services (telephone and communications). 2. Local taxes: a. On real property; b. On salaries.

Doing Business in Mexico 2015 111 In addition to these, there are a number of special federal taxes, such as excise taxes on specific products and services, including high-caloric density food, soft drinks, alcoholic beverages, cigarettes and gasoline. Transfers of real estate are subject to a state tax on acquisitions of real property. The states are not authorized to levy general corporate income taxes, although some states levy a tax on salaries and professional fees on the employer or payer.

Legislative framework Statute law Congress annually approves the federal revenue law, which mainly includes a list of the federal taxes to be imposed during the year. The Ministry of Finance is empowered to issue regulations for implementation of the tax laws, which interpret the legislation in broad terms. Annual omnibus tax rulings published by the tax authorities may be relied on by the taxpayer, although they do not have the force of law. Retroactive legislation is not permitted by the Constitution and its application is not legal. Case law Although court decisions are valid only for the specific case involved, they do offer some degree of precedent. Supreme Court decisions when issued in the same sense on the same issue five times must be followed by other courts when deciding substantially the same factual situation. Antiavoidance Tax legislation contains specific anti-avoidance rules similar to those of other countries. Examples are given below. • In the case of fraud, the authorities may look through the way a transaction is structured to determine its true economic substance. • General provisions that empower the authorities to reconstruct income on an estimated basis or disallow deductions are quite broad. • With the 2014 reform to the Federal Fiscal Code, tax authorities are entitled to request from foreign residents, written confirmation showing that the application of a tax treaty is necessary to avoid double taxation. • General rules to avoid abuse through intercompany pricing have been substantially broadened. Payments to related parties must be determined on an arm’s length basis and properly documented in order for them to be deducted. • Strict rules (documentation, withholding taxes, prior authorization), if not complied with, deny deductibility of costs and expenses. • Transactions classified as subject to preferential tax regimes are subject to specific rules to anticipate the accrual of income, restrict deductions or apply higher income tax withholding rates. Form versus substance Generally, form prevails over substance, except as noted in the general anti-avoidance rules discussed above. Authorities generally base their analyses of transactions on the documentation backing such transactions. Some attorneys are of the opinion that only if the authorities can prove that a fraudulent situation exists in a transaction would substance prevail. However, there is the tendency to consider substance instead of form,

112 Tax and Legal Services - PwC Mexico which might prevail in the near future. Tax authorities have publicly announced their intentions to thoroughly review international structures that could result in Base Erosion and Profit Shifting (BEPS), aligning their efforts to those of OECD countries, and following the appropriate recommendations. Clearance procedures Under the rules of the Tax Code, taxpayers may request advance rulings on actual and concrete specific situations before carrying out a significant transaction if they desire to have legal certainty as to the effects of a proposed transaction. However, such rulings are not easy to secure, and the process can be lengthy and time-consuming. If the ruling adversely affects the taxpayer’s interests, its effects may be overcome by securing annulment in the tax court. For this reason, it is imperative that a potential confirmation request be evaluated thoroughly from its viability stage.

Income tax Concepts of income taxation In general, the federal income tax system is an all-inclusive system with certain exceptions, most notably in the case of some types of interest received by individuals. Interest from the Mexican financial system is taxed at a flat rate and may be credited in the overall annual personal return. The federal corporate tax rate is 30%. Provisions designed to recognize the effects of inflation for tax purposes in the areas of monetary assets and liabilities (monetary correction) and depreciable assets are 13 incorporated in the law. Resident individuals are subject to Mexican income tax on their worldwide income, regardless of their nationality, at graduated rates reaching 35% for individuals with income exceeding Ps3 million in the year. Non-resident corporations and individuals are subject to tax on their various types of Mexican-source income treated separately, but if they are considered to have one or more permanent establishments for income tax purposes in Mexico, all income attributable to such establishments must be consolidated in a single annual return. Non-residents, including Mexican citizens who can prove residence for tax purposes in a foreign country, are taxed only on their Mexican-source income. Mexican citizens need to notify their foreign residency status, with special rules and restrictions applicable in the case of expatriation to low tax jurisdictions. Business entities that have established their main administration or their effective management in Mexico are considered to be tax residents of Mexico.

Doing Business in Mexico 2015 113 Classes of taxpayer Taxpayers are divided into four main groups for which, in addition to the rules of general application, separate sets of rules are provided, as follows. Resident corporations and other organizations taxable as corporations Resident corporations, permanent establishments of foreign corporations and all entities other than those non-profit organizations specifically so designated will generally be taxed in the same manner and under the same rules applicable to resident corporations. These include most privately owned business enterprises, sole proprietorships and professional service providers. These taxpayers are required to include all their income from all sources, with very few exceptions, in a single annual return (see Chapter 15). Resident individuals Resident individuals, whether Mexican or foreign, are subject to Mexican taxation on their worldwide income of all types, most of which must be included in an annual personal income tax return. Taxable income is subject to tax according to the graduated rate schedule shown in Appendix VII. There is special treatment for capital gains and domestic interest (also see Chapters 17 and 20). Nonresident corporations and individuals As discussed in Chapter 16, non-residents may be considered to have a permanent establishment for income tax purposes in Mexico under certain circumstances. In these cases the permanent establishments are taxed in the same way as duly registered branches of foreign corporations, basically following the rules for resident corporations. Non-resident Mexican or foreign individuals are taxed only on their Mexican-source income, at flat or graduated rates applied separately to different types of gross income without deductions, although under special rules they may elect to be taxed at higher rates on net taxable profits from sales of real property or capital stock or short-term construction and similar work. Generally, no overall annual return is required of non-residents. Non-resident individuals rendering personal services temporarily in Mexico who are employees of a non-resident corporation that does not have a permanent establishment in Mexico are exempt if their services are rendered for less than 183 days, consecutive or not, in any 12-month period. If the duration of their services exceeds 183 days, they are subject to tax as described in Chapter 20. Non-resident individuals who render personal services temporarily in Mexico directly to Mexican taxpayers are subject to a graduated withholding tax rate as discussed in Chapter 20.

114 Tax and Legal Services - PwC Mexico Non-profit organizations Under the law, a limited number of organizations and government agencies are exempt from taxes. These include formally registered political parties, the federal, state and municipal governments and their agencies not engaged in business activities. Other non-profit organizations are generally considered non-taxpayers, rather than as exempt from tax. These include a limited number of civil societies and civil associations that are specifically designated as such, although they are required to file annual returns on a calendar-year basis to determine their net excess of income over expenses, and their members are subject to tax only as to any amounts of net income actually distributed. These organizations are relieved of any obligation for advance payments of tax on their operations. The following types of entities are considered non-taxpayers: • Chambers of commerce, of industry, etc.; labor unions; employer, professional, cooperative, and agricultural associations. • Charitable organizations and those established for scientific, political, sports, or religious purposes. • Consumer cooperatives, civil associations or societies engaged in education, if officially recognized and civil societies organized solely to operate savings funds. • Civil societies and civil associations which grant scholarships, as well as entities engaged in the research and conservation of flora and fauna. Notwithstanding the above, certain types of income of non-taxpayers are 13 subject to income tax, including unrelated business income.

Taxable income Taxable income is gross income, which includes any kind of income unless specifically excluded, less allowable deductions and unexpired net operating loss carryovers from prior years, as well as employee profit sharing. Gross income also includes the taxable annual inflationary adjustment, if any. The deductible annual inflationary adjustment, if any, is fully deductible. See Chapter 15 for a discussion of these items.

Tax year The government’s fiscal year is the calendar year, which must also be used by all taxpayers for corporate, legal and income tax purposes. Sole proprietorships and non-profit organizations must also use the calendar year.

Tax-free zones Free trade zones have been replaced by the border region concept (these are discussed in Chapter 8).

Tax holidays There are no income tax holidays for domestic or overseas investors in Mexico.

Doing Business in Mexico 2015 115 Capital taxation Companies No tax is payable on the basis of the value of a company upon incorporation or upon issuance of shares (except for relatively minor state incorporation fees). Individuals There is no tax payable on total wealth or on the value of assets (see Chapter 15). Dividend taxation Legal entities are taxed at a rate of 42.86% of the value of any distributions of profits they carry out in excess of their after tax earnings account (40.85% in 2013, and 38.89% in 2014). In these cases, the tax on distributions are creditable by the legal entity making the excess distribution. Dividends distributed to individual or foreign residents will be subject to a 10% withholding, when distributed on earnings generated from 2014 and thereafter. Dividend taxes may be lower or nil, under the terms of the tax treaties in place with many countries (see Chapter 25 for details).

International aspects Foreign operations As stated above, both individual and corporate residents of Mexico are subject to Mexican taxation on their worldwide income. Tax credit up to the amount of the Mexican income tax is allowed for foreign income taxes paid on foreign-source income, and the law is designed to avoid double taxation of international transactions. Mexico has a number of tax treaties in effect and is currently negotiating additional tax treaties with several other countries (see Chapter 25 for details).

116 Tax and Legal Services - PwC Mexico Chapter 14 Tax administration

Investor tax considerations • Resident taxpayers (corporate or individual) are subject to Mexican taxation on worldwide income. • Non-resident taxpayers (corporate or individual) are taxed on Mexican-source income only. • Corporate taxpayers are required to file an annual income tax return no later than March 31st, of the following year. • Corporate taxpayers are generally required to make monthly advance payments; there are no extensions for corporate returns. • Individual returns are due on April 30; no extensions are granted. • Filing of financial statements that have been audited by an independent public accountant with an opinion on the tax status is optional, considering certain parameters, as taxable income, number of employees and the value of the fixed assets. • Penalty interest is payable on any unpaid tax, as adjusted for inflation. • Joint returns are not permitted. Placing income-producing assets in the name of the non-working spouse can result in some savings. 14 • Individuals receiving compensation directly from abroad must generally make monthly estimated tax payments. • Severe penalties, including imprisonment, can apply in the case of fraud and for failure to file returns, withhold taxes or pay tax liabilities. • Departing aliens should notify tax authorities of the cessation of their tax obligations.

Principal taxes The principal taxes in Mexico are as follows (also discussed in Chapter 13): 1. Federal taxes: a. Income tax; b. Value-added tax; c. Custom duties; d. Payroll taxes, mainly social security.

2. Local taxes: a. On real property; b. On salaries

Doing Business in Mexico 2015 117 Administration of the tax system Taxes are imposed by the federal, state and local governments through the federal and state legislatures. The federal income tax, value-added tax, and customs laws are administered by the Internal Revenue Service (Secretaría de Hacienda y Crédito Público–Servicio de Administración Tributaria or SAT), therefore, such organism collects the taxes for the state.

Corporate taxpayers Tax returns Corporations are required to file an annual income tax return for each calendar year no later than March 31 of the following year and to pay the balance of tax due at that time. A newly organized company must file its first return for the period ending on December 31 of the year of incorporation. In cases where taxpayers have chosen to have their financial statements audited by a certified public accountant, these must be filed, together with the accountant’s opinion on the taxpayer’s compliance with the tax laws, by July 15 of the following year. Penalty interest is payable on any unpaid amount. Information returns An annual information return must be filed by February 15 of the following year providing details of suppliers and customers and the volume of transactions with each. Additionally, annual information returns are due by February 15 of the following year covering investments in low-tax jurisdictions, taxes withheld on payments abroad and to certain residents, charitable donations, and on loans received from or guaranteed by foreign residents. An annual information return regarding transactions with related parties abroad should be filed with the annual income tax return. Amended returns A taxpayer may not file an amended return for a given year more than three times, except when the amendment is a result of an audit by the authorities or it results in an additional tax liability or a reduction in a net tax loss carry forward. Assessments The taxing system is largely one of self-assessment by means of periodic tax returns subject to audit by the authorities. Great reliance is placed on the requirements for tax withholding by those who make payments representing taxable income to the recipient, except for payments to resident business enterprises. Filing of financial statements and opinions of public accountants As a mean of facilitating the official review of corporate tax compliance, the Federal Tax Code contains an optional procedure that, if elected, requires business enterprises to file audited financial statements together with the tax opinion of an independent public accountant registered with the Ministry of Finance.

118 Tax and Legal Services - PwC Mexico This optional procedure is only available for taxpayers with gross income in excess of Ps 100,000,000, or whose assets were stated at more than Ps 79,000,000 in the preceding year or who employed 300 or more persons in each month of the preceding tax year. These thresholds are updated for inflation on an annual basis. The special report for tax purposes containing the opinion of the independent public accountant must be filed in connection with the taxpayer’s income tax return by July 15 of the following year. Any qualified taxpayer that has chosen filing this report, must state this situation at the time they file their income tax return corresponding for the fiscal year in which they decided to exercise this option , this is, no later than March 31 of the year following the period to be audited. There is no need to audit taxpayers that have formally suspended activities as from the second tax period after having filed the notification of suspension. Detailed additional schedules must be filed with the accountant’s report, together with a separate opinion to the effect that during the audit tests carried out in compliance with generally accepted auditing standards the accountant observed no irregularities in respect of any federal income tax or other federal taxes payable directly or required to be withheld by the company. Any items noted but not satisfactorily corrected must be included in the report. The financial statements and opinions of public accountants must be filed electronically in accordance with the tax authorities’ rules by July 15 of the following year. This period can be extended in some cases. As from 2014, the following taxpayers must file an informative tax return regarding its fiscal situation in accordance with the tax authorities’ rules by June 30 of the following year. 14 a. Taxpayers with gross income equal or in excess of Ps 644,599,005. b. Taxpayers which are public in Mexico (i.e. shares in stock markets). c. Entities which “integrate” tax results (new consolidation regime). d. State owned entities. e. Foreign entities with a permanent establishment in Mexico. f. Entities resident in Mexico, with transactions carried out with foreign entities. Import and export tariff classifications and the values declared for custom purposes are not expected to be covered by the accountant’s opinion. Questions arising from the desk review normally carried out by the authorities are generally directed to the public accountant. The tax authorities are empowered to close their tax audits at their discretion based on the circumstances. Additionally, similar compliance opinions are established for local payroll and real estate taxes and tariffs for water consumption imposed by the Federal District (i.e., Mexico City) when taxpayers employ 150 or more persons (monthly average), have net worth of Ps 32,852,824 (for each property or as a conjunct) or more, or use 1000 m3 or more of water. The due date for filing the notification of the intention to file this report is generally February 15, and the deadline for filing the report with the local authorities is generally April 30. This period can be extended in some cases. Other states requiring similar opinions for local taxes are Mexico State, Guerrero, Quintana Roo and Oaxaca.

Doing Business in Mexico 2015 119 Appeals If tax deficiencies are determined as a result of an examination by the tax authorities, objections the taxpayer may have against any of the findings included in the report issued by them must be stated and included in the same report at the conclusion of the examination. The tax authorities are empowered to assess any additional tax to be paid. The taxpayer may present a formal request for revocation of the assessment (administrative appeal) to the technical division of the specific authority that made the assessment. This authority will be the relevant Legal division of the tax authority. Alternatively, the taxpayer may appeal to the Tax Court, asking that the assessment be annulled. Court cases are handled by attorneys, but, in any event, usually with assistance from accountants as experts in the matter of the trial. Payment and collection Corporate taxpayers are required to make advance payments of income tax on the 17th of each month. However, such advance payments should be made on the basis of an estimated annual taxable income, determined by applying to the gross income of the current year the preceding year’s ratio of taxable income to gross income (the “profit factor”), less any loss carry forward of prior years’ still pending utilization. If good reasons are given, the SAT has authority to waive all or part of one or more of the advance payments at the taxpayer’s request, in the last months of the year. Advance payments are not required during the first year of operation of a business. The law provides a procedure whereby corporations must make advance payments even when there was no profit factor arising in the previous 12-month fiscal period (e.g., in loss years). Consequently, taxpayers are required to use the profit factor corresponding to the most recent taxable year that resulted in a profit within the most recent five year period. Withholding taxes In many cases a company making payments to third parties is required to withhold and pay to the tax authorities an amount of income tax on account of the recipient. In all such cases, the company is jointly liable for the tax that should be withheld, and on failure to do so it is subject to penalty interest and fines. The withholding obligation exists in general for all payments to individuals, including employees, and payments to foreign entities that are not registered in Mexico. This includes most payments abroad, as described below. In all cases where the income tax law does not establish a specific period within which corporations should remit taxes withheld, the period for payment will be the 17th of the month following that in which the taxes should be withheld.

120 Tax and Legal Services - PwC Mexico Payments to foreign residents In general, a withholding obligation exists in connection with income paid to foreign residents (corporations or individuals) with a source of wealth located in Mexico. The corresponding withholding rate is applied to the total income without deductions, except in certain cases where income tax withholding may be determined on the net gain, such as when a qualified resident representative is appointed in connection with, for example, sales of real property or shares or for short-term construction or similar income. All withholding taxes from payments to foreign residents should generally be remitted by the 17th of the month after the date the payment was due, even if no payment or withholding is actually made. Moreover, payments made in advance of their due date would accelerate the withholding and remittance obligations. Tax audits In accordance with provisions of the Income Tax Law, income tax returns are considered accepted by the authorities as filed, although the tax authorities are empowered to review or audit in detail any return they may select. There is no rule as concerns how the authorities may select a taxpayer for a tax review to be carried out, although the authorities have a system that identifies review candidates based on their risk factors. The tax authorities are empowered to review the taxpayers’ accounting records in order to determine compliance with tax obligations. The authorities can review any kind of federal tax, including foreign trade taxes. Penalties Penalty interest (surcharges) up to the amount accrued over a period of 5 years and in some cases ten years (based on the statutory limitation period, as mentioned below, and therefore generally limited to five years) is payable on delayed payments or additional 14 assessments as from the date the tax should originally have been paid. Interest is calculated on the tax deficiency as adjusted for inflation. Fines may also be assessed in the case of tax omitted, unless the taxpayer voluntarily pays the omitted tax or corrects the obligation not complied with prior to a formal request for payments or to a receipt of a notification of a tax inspection for the year in question. In certain cases of failure to pay, incarceration can be imposed if smuggling or fraud is proven. Statute of limitations In general, the right of the tax authorities to collect taxes, review tax returns or claim additional tax expires five years after the date the corresponding return is filed. However, where the taxpayer did not secure a federal taxpayer’s registry number, did not have accounting records, failed to keep them for the required ten-year period, or did not file a tax return the statute of limitations expires in ten years. Similarly, the period for claiming a refund of overpayment of taxes expires after five years.

Doing Business in Mexico 2015 121 Individual taxpayers Assessments In general, the tax system relies on withholding and advance tax payments from individuals as the basis for enforcing compliance with the income tax law. Also, annual personal income tax returns are required for most situations. Imputation of taxable income When individuals spend more than the income shown in their income tax returns during a calendar year, the tax authorities are authorized to consider the excess of such expenses over the income declared as additional taxable income for the individual. After notification, the taxpayer is granted a period of 15 days within which to file a protest and 20 days to prove a case. Otherwise, the authorities will issue the corresponding additional tax assessment. In addition, certain non-taxable items must be disclosed in the annual tax return, otherwise they will be considered taxable. Tax returns Most individuals receiving income during the calendar year are required to file an annual tax return no later than April 30 of the succeeding year. Individuals with less than Ps$400,000 or about US$30,000 of salary income, in most cases, are not required to file an annual tax return. Applicable forms, depending on the type of income and deduction to be declared, are listed in Table XI. Penalties for late or improper filing are the same as for business enterprises, as stated above.

XI—Tax Forms

Form number Applicability

13 – Comprehensive form Taxpayer with several types of income.

13-A – Salaries only For taxpayers who receive only a salary or wages.

Under current tax provisions, except in specific cases, annual tax returns must be filed using the electronic system established by the Mexican Tax Administration (SAT). For that purpose, in most cases the taxpayer must have an electronic tax compliance password called Advanced Electronic Signature (Firma Electrónica Avanzada or FIEL).

122 Tax and Legal Services - PwC Mexico Payment and collection The amount of tax shown as due on the annual return (net of applicable taxes withheld, tax credits and advance payments) is payable upon filing the return, no later than April 30.

Advance payments Substantial amounts are withheld from salaries and certain other types of income as summarized later in this chapter. In addition, individuals are required to make advance payments on the following specific types of income: • Salaries received from abroad: Monthly advance tax payments on salaries and wages received from foreign employers, or others not required to withhold tax, should generally be filed by the 17th day of the following month. The tax due should be calculated by applying the graduated rate table to the wages received each month.

• Business activities and Professional fees: Advance tax payments are due, on a monthly basis, on income net of deductible expenses. Monthly advance tax payments are due on income net of deductible expenses.

• Rental of Mexican real property: Optionally, a flat 35% of the rental income can be deducted instead of the actual expenses. Advance tax payments are not required if the rental income during the year is less than ten times the minimum wage for the month (not applicable if the taxpayer has other income).

• Sale of Mexican real estate: The notary public who processes the documentation for the sale must withhold income 14 tax, in accordance with the holding period and should file an advance tax payment within 15 days after the closing.

• Sale of other personal property: An advance tax payment is due equal to 20% of the gross income and should be paid through withholding or paid within 15 days after the income is obtained.

• Income from the acquisition of assets below fair market value: A 20% advance tax payment is due within 15 days after receiving the tax assessment from the tax authorities.

• Interest received on loans if received on a continuing basis: A semiannual advance tax payment is due on the gross income without deductions.

• Sporadic income (e.g., forgiveness of debt, guarantor fees, etc.): An advance tax payment equal to 20% of the gross income is due within 15 days following the date the income was obtained.

Doing Business in Mexico 2015 123 Tax withholding Tax withholding is required as follows. Salaries and wages Mexican employers are required to withhold income tax on remuneration paid to employees at the rates established, and they must remit the withheld taxes generally by the 17th of the following month. Furthermore, since most employees whose total taxable wages for the year do not exceed Ps $400,000 or about US$ 30,000 are not required to file an annual tax return, employers are required to true-up the tax withholdings by determining the total tax payable for the year and withhold any balance due or refund any excess withholdings. Any net balance due must be paid at this time, and overpayments are recovered by reducing withholdings for subsequent months. An adjustment of the withholding for December is authorized by the law to avoid overpayments. This true-up procedure does not apply to employees who leave the employer before December 1 or who confirm in writing that they will be filing their own annual returns. The regulations establish special procedures for calculating monthly withholding when, in addition to normal salary; an employee receives bonuses or payments covering several months, other than for severance compensation. Employers are also required to file an information return no later than February 15 of the following year. The return requires a detailed disclosure of taxable and exempt compensation paid to each employee and the corresponding income tax withheld. The employer must also indicate which employees were subject to the true-up mentioned above and which ones received any cash payments corresponding to the salary subsidy. Severance compensation The tax to be withheld, if any, is calculated at the effective rate of tax withholding on the most recent normal monthly salary or, if less, by applying the monthly tax rates separately to the taxable portion of the severance compensation. Fees for independent personal services, rent and miscellaneous types of income Corporations are required to withhold 10% of professional fees or rent paid to individuals, and 20% of miscellaneous income. Other types of income Under some circumstances, withholding taxes are also applicable to other types of income received by individuals, including the following: a. Interest on fixed-income securities. (see “Interest income” in Chapter 20); and, b. Proceeds from sales of securities and other personal property (see “Capital gains” in Chapter 20).

124 Tax and Legal Services - PwC Mexico Penalties Penalty interest, inflation adjustments and fines for delayed or omitted tax payments are the same as those described for corporate taxpayers. Tax audits and appeals procedures Individual tax returns are subject to the same type of audit and appeals procedures as those described for corporations. Community property When an individual is married under the Mexican community property rules, income derived from capital investments is considered to belong to both spouses in the proportion established by the terms of their marriage contract. On the other hand, the income tax law provides that remuneration for personal services or profits from a business enterprise is reportable exclusively by the person who renders the services or carries out the business activities. Foreign personnel Foreign nationals residing in Mexico are subject to the same compliance requirements as Mexican nationals residing in Mexico. Non-residents, including Mexican citizens who have terminated tax residency, are taxed only on their Mexican-source income. Exit permits Before the final departure of a tax resident, an appropriate notification must be filed in order to have the authorities suspend the individual’s registration and obligations for tax purposes and notify the authorities of the termination of the individual’s status as a tax resident. No formal tax clearance has been established as a condition for boarding or exiting for departing citizens or foreigners. 14

Partnerships and joint ventures Tax administration for Mexican partnerships and joint ventures is the same as for corporations, as described above. An association in participation agreement (Asociación en Participación–A. en P.–a type of joint venture) exists, but the activities carried out through this instrument do not create a separate legal entity. However, A. en P.s are subject to the same tax treatment as regular companies and the active partner must pay the tax and comply with the A. en P.’s tax obligations.

Doing Business in Mexico 2015 125 126 Tax and Legal Services - PwC Mexico Chapter 15 Taxation of corporations

Investor considerations • Mexican corporations are taxed on worldwide income. • A 30% corporate tax rate is imposed on net taxable income. • Net Operating Losses may be carried forward for 10 years. Capital losses (i.e. losses on the sale of shares) can only be carried forward against the same kind of income. • Thin capitalization rules provide for a 3:1 debt to equity ratio. Interest arising on excess indebtedness is not deductible. • Interest paid to a related party may be treated as a dividend in certain circumstances (e.g. on back to back loans). • Although inflation rates have decreased in recent years, leveraged corporations must recognize an inflationary gain as additional taxable income and an inflationary loss as a deductible expense. • Residents abroad and Mexican individuals will be subject to an additional 10% withholding tax on dividends paid from profits generated as from 2014, considered a definitive payment. • Dividends from after-tax earnings are not subject to additional taxation at a corporate level. • Capital gains are wholly includable in gross income and are taxed at the same rate as ordinary income. • All inter-company transactions are scrutinized closely and are subject to contemporaneous documentation requirements to 15 support inter-company prices. • Deduction of cost of goods sold was re-introduced as of 2005, replacing the deduction of purchases. • Business Flat Tax, which was an alternative tax to the income tax, has been repealed as from 2014. • Cash Deposit tax has been repealed as from 2014; however, entities belonging to the financial system must report annually on cash deposits received by taxpayers in accounts opened in their name when the total amount exceeds $15,000 per month. • As from 2014, the tax consolidation regime was eliminated. However, a new regime of “integration” has been created for corporate groups, based on a shareholding participation of 80%, to defer certain amount of income tax over a maximum of three years. • Tax holidays are not available for federal taxes. • Employee statutory profit-sharing payment is deductible. • As from 2014, the special regime for Real Estate Investment Corporations (“SIBRAS”) is eliminated, prevailing the public Real Estate Investment Trusts. The deferred gain on SIBRAS should be paid no later than 2016. • Specific rules are applicable for recognition of un-remitted income arising from investments in preferential tax regimes (tax haven rules).

Doing Business in Mexico 2015 127 • Mexico does not recognize any transparency for foreign corporations. • Mexican source income obtained by foreign non-taxed corporations is considered as income obtained by an entity resident in a preferential tax regime (tax haven). • Deduction for payments to foreign related parties and entities resident in tax havens, have specific requirements. • Other deduction limitations and requirements were included in the 2014 tax reform.

Corporate tax system Corporations and shareholders The tax rate for corporate taxpayers is 30% Profits taxed are included in the net after tax earnings account (CUFIN) from which dividends can be paid out free of additional corporate taxes. CUFIN balance must be restated for inflation. When dividends are not paid out of the CUFIN, they should be grossed up by a specific factor (1.4286) in order to determine the additional corporate tax payable by the company. This additional corporate tax can be credited in the year of payment and the following two. On the other hand, individuals and parties resident abroad are subject to an additional 10% tax on dividends or earnings distributed by Mexican companies or permanent establishments located in Mexico. This tax must be withheld by the distributing entity. The aforementioned 10% tax is applicable only to profits arising as from 2014. In this regard, the entity or permanent establishment is required to track the CUFIN balance with earnings generated up to 2013 and those generated as from 2014 (i.e., post 2013 CUFIN balance).When these two accounts are not handled separately or profits cannot be identified, the earnings distributed are deemed to be generated as from 2014.

Taxable entities Taxable entities include different types of companies, such as corporations, limited liability companies, Mexican partnerships and organizations of a civil nature other than those specifically designated as non-profit organizations, as described in Chapter 13 under “Classes of taxpayer”. Under certain circumstances non-resident corporations (or individuals) may be considered to have a permanent establishment in Mexico for income tax purposes, including branches of foreign corporations duly registered to operate in Mexico. The business operations of such establishments are taxed in the same manner as a corporation, with the relatively few differences described under “Branch versus subsidiary” later in this chapter. The Federal Tax Code provides that corporations are to be regarded as residents of Mexico if their principal administration or effective management is established in Mexico. All partners and shareholders of Mexican companies must be registered for tax purposes, except those who acquire their shares on recognized stock markets or markets with high trading volumes. This requirement is met by corporations or entities providing the relevant information on partners and shareholders.

128 Tax and Legal Services - PwC Mexico Territoriality Domestic taxpayers (both corporations and individuals) are taxed on worldwide income from all sources unless specifically exempt, with a limited foreign tax credit for foreign taxes paid on foreign-source income. Permanent establishments of foreign entities are generally subject to tax only on income attributable to such establishments in Mexico.

Gross income Accounting period Taxpayers are required to use the calendar year for income tax purposes. Newly formed corporations will have a short taxable year from the date of incorporation to December 31 of that year. Similarly, existing corporations will have a short taxable year in the year in which liquidation procedures commence. Accounting methods A modified accrual basis of accounting is required of all business taxpayers for income tax purposes. In the case of sales of goods or services, revenues should be recognized for income tax purposes in their entirety in any of the following situations (whichever occurs first). • When a document (invoice, receipt, etc.) is issued that supports the agreed price or remuneration. • When the goods are physically shipped or delivered, or when the services are rendered. • When the price or payment becomes legally due or payable, or is received in whole or in part, even if it is considered an advance. The revenues of civil entities rendering professional services (e.g., legal, accounting, medical, engineering, or architectural firms) are not recognized until collected. 15 A special system is available to determine taxable income for taxpayers in certain industries (among others, farming, fishing, livestock breeding, or timber activities.

Financial leases Financial or capital lease contracts are considered as a sale by the lessor. Consequently, the lessor is not entitled to depreciate assets covered by these contracts. For income tax purposes, a financial lease exists when a person is obligated to provide to another the temporary use of tangible goods on a fixed term and the latter is obligated to pay several instalments as the price of the good, which amount covers the acquisition cost of the goods, the financial charges and other payments and to elect at the end of the lease term, one of the following options, as stated in the General Law on Auxiliary Credit Organizations and Activities: • The purchase of the goods at a price lower than the acquisition value. • Extend the financial lease contract at a lower price. • Participate with the lessor in the sale of the goods to a third party. • A written contract must exist specifying the value of the asset and the interest rate or the method for determining such interest rate.

Doing Business in Mexico 2015 129 Revenues from long-term contracts for the construction of buildings or the long-term manufacture of personal property (e.g., large machinery) must be recognized for tax purposes when the periodic estimates of work completed are approved by the customer for payment. In the case of personal-property long-term contracts, revenues should be determined on the basis of the quarterly construction work advance or the manufacture of the equipment, if such estimates are not presented at least every three months. If advance payments, guarantee deposits, etc., are received, the entire amount of the advance or deposit must be recognized as income. Costs incurred under such contracts are deductible in the years in which they are incurred, and in some cases estimated future costs can be charged against such revenues.

Business profits There are several differences between business and tax profits (e.g., depreciation rates, inflation effects). These differences should be reconciled on an annual basis, when the annual tax return is filed.

Inflation gain or loss Taxpayers are required to calculate an adjustment due to inflation (i.e., additional taxable income) on an annual basis by applying the percentage increases in the National Consumer Price Index to essentially all liabilities net of monetary assets, including bank balances, investments (except in shares) and some notes and accounts payable. On the other hand, taxpayers may have an inflation loss (i.e., additional deduction) if their monetary assets, including bank balances, investments (except shares) and some notes and accounts receivable, exceed their monetary liabilities. It should be mentioned that liabilities that may arise from non-deductible items and the debts that exceed the debt-to-equity ratio (according to the thin capitalization rules) would not be considered in the calculation of the adjustment for inflation. Intercompany transactions For tax purposes, intercompany charges should meet arm’s length requirements, (i.e., terms and conditions should be comparable to transactions between unrelated parties). Prices paid for goods bought from foreign or local affiliates or any other source are subject to review by the tax authorities and, if not considered to represent true local or foreign market prices, may be adjusted under broad transfer-pricing provisions. Domestic and foreign transactions must be supported by the application of a recognized transfer pricing method following a preferred method rule. Such methods are: (1) the comparable uncontrolled price method (CUP), (2) the resale price method, (3) the cost-plus method, (4) the profit split method, (5) the residual profit split method, and (6) the transactional net margin method. Taxpayers are first required to apply the CUP method, when determining prices in transactions carried out with related parties. If the taxpayer can demonstrate that the CUP method is inappropriate, the other transfer pricing methods can be applied. Moreover, the resale price and cost plus methods are the next preferred methods after the CUP method. A range of prices or margins could be established by the application of any of the above-mentioned methods. If the price or margin is within the range, the transaction would be considered as carried out at fair market value.

130 Tax and Legal Services - PwC Mexico Taxpayers must secure and maintain contemporaneous documentation supporting transactions carried out with related parties, especially with foreign related parties, providing appropriate support that income and deductions are based on market values. This documentation must be prepared per type of operation, and must include all operations carried out with related parties. In addition, the tax authorities have the power to reconstruct income declared by a taxpayer from sales made at less than current market prices or at cost or less. The income from sales at less than cost will be accepted as declared if the taxpayer can prove that the sales prices represented current market prices for the merchandise, that the items sold represented damaged or obsolete merchandise, or that other special circumstances existed that made it necessary to sell at less than cost.

Tax havens Payments made to residents of tax havens are considered non-deductible, unless it can be demonstrated that the price of the transaction is the same as would be set between or among unrelated parties in comparable transactions and other requirements are met, such as remit the corresponding withholding tax as applicable.

Shares The sales price of shares (other than publicly traded shares) sold to a related party must be set at market value and the transaction must be supported by the corresponding contemporaneous transfer pricing documentation. Inventory valuation The Cost of Goods Sold is deductible in the year in which the income arising from the sale of goods is accrued. Special provisions apply for the inventory that was on hand as of December 31, 2004 (year of change in the current law). For tax purposes, the incurred cost system based on historic or predetermined costs is 15 required. If the requirements in the Regulations to the IT Law are met, the direct cost system, based on historical costs, may be used. Inventory may be valued by any of the following methods: • First in-first out (FIFO) • Identifiable costs • Average cost • Retail Taxpayers selling goods that are identifiable by serial numbers, at a cost exceeding $50,000, must value their inventory by the identifiable cost method. The election of a method is compulsory for five years and can only be changed when the requirements established in the IT Regulations are fulfilled. The results of the change in method will be amortized during the following 5 years. For accounting purposes different methods and certain variations can be applied. However, a record of the differences must be maintained, and such differences will not be taxable or deductible.

Doing Business in Mexico 2015 131 Imported merchandise The cost of imported goods may be deducted (and included in the cost of goods sold) only if it can be shown that the goods were legally imported into the country

Capital gains

Securities Capital gains on the sale of shares and other securities are includable in regular taxable income. There are two different procedures for computing the tax basis of a Mexican company’s shares, depending on the period the shares were held (i.e., less or more than twelve months). The cost basis purchase price of shares of Mexican corporations sold may be increased by the inflation adjustment factor for the holding period. In the case of shares with a holding period of more than twelve months, there are certain items to be considered when computing the tax basis of each share, including: In the case of shares with a holding period of more than twelve months, there are certain items to be considered when computing the tax basis of each share,including: • The change in the Mexican tax basis earnings and profits account known as the CUFIN account of the issuing corporation (including the possible negative CUFIN effects), adjusted for inflation during the period the shares were held (considering for this purpose the CUFIN balance); - The unutilized prior years’ tax losses at the date of the sale, as well as tax losses arising prior to the date on which those shares were acquired and amortized during the holding period and; - Any capital reductions of the issuing company. Losses on the sale of shares are deductible only if the acquisition and sale comply with the general rules established by the tax authorities. The deductible amount is limited to the gains from similar transactions in the same or the following five fiscal years. Losses may not be deducted by non-residents selling shares, and these losses are not deductible against ordinary income. Certain exceptions to the capital loss recognition rules may apply. • Non-resident sellers of Mexican shares In general terms, the sale by non-residents of shares issued by a Mexican company is subject to a 25% income tax applicable on the gross amount of the transaction. Alternatively, gains realized by non-residents on the sale of shares issued by a Mexican company may be taxed by applying the statutory 35% rate applied to the net gain (i.e., value of the transfer less the tax basis of the shares). This election is only available if the foreign shareholder is a resident of a country that is not considered to qualify as a “preferred tax regime jurisdiction”1 (tax haven) or a country with a territorial tax system. The selling resident abroad must have previously appointed a representative in Mexico and have a public accountant issue a statutory tax audit report on the transfer of shares. The public accountant issuing the respective report must specify the accounting value of the shares sold, and explain the factors used in determining the sales price and the market value of the shares, when shares are sold between related parties.

132 Tax and Legal Services - PwC Mexico Gains and losses from derivative financial transactions of a capital nature are taxed under a special procedure depending on the type of transaction. Related party losses from derivative financial transactions are non-deductible in certain cases (i.e., if the applicable terms are not arm’s length). In any case, certain tax treaties may reduce the rate of taxation of capital gains or change their treatment. This should be analyzed on a country-by-country basis.

Real estate In determining taxable gain or loss on the sale of real estate, the historical-cost basis of land and buildings may be adjusted (i.e., increased) for inflation, according to the time that the assets have been held. This is done by applying inflation-adjustment factors to the net undepreciated balance. Similar rules apply to non-residents electing to pay 35% tax on net gain, by appointing a legal representative in Mexico. Otherwise, the 25% final withholding tax on gross income usually applies to non-residents. It is important to mention that a specific tax regime is applicable for Real Estate Investment Trusts, which is described below.

Machinery and equipment Gains or losses from the sale or disposition of machinery, equipment and other fixed assets are also calculated by deducting from the sales proceeds the net undepreciated balance as adjusted for inflation.

Gains on sales of assets restricted as to depreciation In the case of certain company-owned assets whose cost is generally not depreciable for tax purposes, such as personal residences, yachts and airplanes, which may be depreciated only in very limited circumstances, the entire sales price will be considered 15 as the taxable gain without deduction of the original cost. When only part of the cost of an asset is depreciable for tax purposes, as in the case of some automobiles, the non- depreciable part of the cost will not be deducted in determining the gain on a sale. Interest Interest income is taxable on an accrual basis, whether or not collected in the same period, except in the case of penalty interest charges (imposed for failure to meet designated obligations on time), in which case the creditor recognizes the income when it issues a formal invoice or receives the revenue in cash, in kind or in services. Income tax withholding is required to be remitted to the government by the payer of interest on the earlier of: (1) when the interest is due, or (2) on the date on which the interest is paid. Withholding tax rates on interest payments differ according to: a) the type of loan b) the beneficiary of the interest and c) the effect of any tax treaty in force. Derivative financial transactions covering debt Gains and losses from derivative financial transactions covering debt are treated similarly to interest income and interest expense, including recognition of inflation adjustments and foreign currency gains and losses and applicable withholding tax provisions. Transactions classified as mixed debt/capital are considered debt-related derivative financial transactions.

Doing Business in Mexico 2015 133 Dividends Dividends from foreign corporations are fully taxable. A foreign tax credit is allowed for the foreign income taxes paid on such dividends, if certain conditions are met. The 2014 tax reform includes new rules and procedures to determine the applicable foreign tax credit in Mexico, being one of the significant changes that the tax credit should be computed separately on a jurisdiction basis. Undistributed earnings of foreign corporations are not taxable until actually received by the Mexican shareholder, except in the case of entities. Intercompany dividends Dividends received by Mexican corporations are not includable in gross income, but they must be added to the recipient corporation’s CUFIN account. Up to 2013, dividend income was subject to 10% compulsory profit sharing. However, as from 2014 the profit sharing base became the same than for income tax purposes. Stock dividends Stock dividends are not taxable to the recipient. However, these dividends are generally subject to the 10% mandatory employees’ profit sharing (see Chapter 10). Dividends-in-kind Intercompany dividends received in kind instead of in cash are also non-taxable. The recipient treats them in the same manner as cash dividends for all purposes, including employee profit sharing. However, the distributing corporation may be required to recognize income when it makes a distribution-in-kind, as noted below. Distributions or payments-in-kind When a corporation effects a payment-in-kind or distributes assets that have appreciated in value it must include as regular taxable income, the excess of the appraised value over the net tax basis of the property transferred. In the case of stock distributions in corporate reorganizations, the transactions may be tax-free or the tax may be deferred until the shares are sold out of the Group. Royalties and service fees Royalties for the use of patents, trademarks or trade names as well as fees for services of any kind are fully taxable. Exchange gains and losses Foreign exchange gains and losses arising from assets or debts in foreign currencies are taxable or deductible, respectively, on an accrual basis. There are specific rules on the methodology to be applied in determining these gains or losses which often differ from the financial statement treatment. However, the effects of the related inflationary gain or loss should be considered, as discussed under “Business profits” above.

134 Tax and Legal Services - PwC Mexico Tax havens or Preferred Tax Regimes As from 1997, Mexico incorporated a series of rules intended to regulate the taxation of investments and/or transactions in territories commonly known as tax havens, later denominated as Jurisdictions of Low Tax Imposition or Preferred Tax Regimes, establishing a list of such jurisdictions. As from 2005, Preferred Tax Regimes (hereinafter “PTR”) are no longer limited to a list of countries (“black list”). Mexican taxpayers are now subject to immediate taxation on undistributed foreign source income that arises from its direct or indirect subsidiaries or any other investment vehicle when the income of that PTR vehicle is subject to an effective foreign tax rate of less than 75% of the Mexican tax to which the same income would have been subject, had it been generated under the Mexican income tax rules. Investments in PTRs include those made directly or indirectly in entities, branches, real property, shares, bank accounts or investment accounts, and any kind of participation in entities, trusts, joint ventures or investment funds, as well as in any other similar legal entities created or incorporated in accordance with foreign law and located in a tax haven, including those that are carried out through an intermediary. Income shall be deemed to be from a PTR when it arises from the application of a legal, regulatory or administrative provision or an authorization, refund, application as credit, or any other procedure, and the income tax actually due and paid in the country or jurisdiction concerned is less than that due or payable in Mexico. In other words, it is not a simple comparison of tax rates, but an analysis of the tax actually due or paid in each country is required, and if this tax is less than 75% of the tax rate that would apply had the income 15 been earned in Mexico, is considered income from a PTR. One of the effects of this is that Mexican taxpayers with foreign investments must calculate the effective rate of tax of all of their investments on an annual basis, in order to determine whether the undistributed income must be immediately reported and taxed in Mexico. The determination as to the effective rate abroad may be done on an entity-by-entity basis, country–by- country basis or for each operation. The second effect of such rules is that Mexican taxpayers that make certain payments that are Mexican source must determine whether to withhold at a punitive 40% rate rather than the normal withholding tax rates applicable to payments abroad. This punitive rate is only applicable in transactions with related parties. Mexican tax residents or Permanent Establishments of foreign residents are required to include the income located abroad subject to PTR that they directly generate or through entities or foreign legal structures in which they participate, directly or indirectly, in the proportion that corresponds to their participation in the capital of these entities or legal structures, unless it can be demonstrated that the party in question does not have management control over the investments.

Doing Business in Mexico 2015 135 The PTR income regime provides two other exceptions. If the PTR income arises in a country with a broad exchange of information agreement in place with Mexico and the income is “not” passive income, it will not be deemed to be PTR income. If a broad exchange of information agreement does not exist, the Mexican taxpayer may file the opinion of a certified public accountant. This exception for active income does not apply to Mexican taxpayers making purchases or sales through their PTRs to the extent the goods were produced or sold in Mexico. Also, the income earned by a PTR entity will be exempted where the PTR income arises from a business activity and at least 50% of the total assets of the entity comprises fixed assets, land and inventory used in such business. This exception may not be applied, however, if income such as interest, dividends, royalties, certain capital gains and rents (i.e., passive income) represents more than 20% of the total income generated by the taxpayer. The PTR income will be determined on a yearly basis and it will not be included with other income of the taxpayer. This means that the taxpayer must record such transactions separately. In general, taxable income would be gross income, unless the taxpayer has the books and records available to the tax authorities and an information return is filed on a timely basis. The inflationary gain on liabilities and stated interest income are included in taxable income without subtracting the inflationary component relating to receivables. However, the inflationary component relating to receivables may be subtracted from interest if an information return is filed. The tax on direct investments in PTR is 30% of taxable income. Additionally, net operating loss carry forwards associated with the low-tax jurisdiction may be utilized in each of the 5 taxable years following the taxable year of the loss, as long as the accounting records of said investments are available and the information return is filed on a timely basis. Taxpayers must keep an account for income or profits arising in PTR. Dividends received must be added to the after-tax earnings account (CUFIN). The obligation to file in the month of February of every year the informative return of income subject to PTR generated in the immediate previous fiscal year applies to those taxpayers who are in the following cases: 1. Obtain PTR income described above. 2. Obtain income of any nature from any of the territories indicated in the Transitory Provisions published in the ITL (black list – Appendix I). 3. Obtain income generated in one or more transparent foreign entities or legal structures for tax purposes and they are not deemed to be taxpayers in the country of their organization or the profits generated through them are taxed at the owner level. Withholding tax rate on PTR income As a general rule, any income paid to related parties resident in a PTR are subject to a withholding tax rate of 40% on gross income without any deduction. The withholding should be applied by the Mexican resident (or permanent establishments of non- residents) payer. This rate does not apply to distributions of dividend and capital gains income, as well as to certain type of interest.

136 Tax and Legal Services - PwC Mexico Association in Participation (“Asociación de Participación”, “A de P”) Associations in Participation are not separate legal entities. Legally, all the activities of the Association in Participation are conducted in the name of the active partner. Nevertheless, the Association in Participation is treated as a separate regular corporation for tax purposes, even though the active partner must pay the tax and comply with the Association’s tax obligations. The active partner does not combine the taxable income or loss of the Association in Participation with its other taxable income or losses. Distributions received by passive partners from the Association in Participation are taxed as dividends. The Association in Participation should record its own CUFIN, profit distributions are subject to the treatment applicable to dividends, and when the Association in Participation agreement is cancelled or terminated, the capital reduction rules apply. Contributions of non-cash assets to the capital of corporations are treated for tax purposes as sold at fair market value by the shareholders. However, goods contributed to an Association in Participation by the active and passive partners are considered to be sold to the joint venture at a value equivalent to the restated net adjusted tax basis of the investment. Depreciation may only applied on assets which have been contributed to the Association in Participation. Nontaxable income The relatively few types of corporate income that are not subject to income tax include the following: • Dividend income from Mexican resident corporations.Proceeds from stock redemptions associated with investments in shares of Mexican corporations. However, the redeeming corporation is subject to tax in certain cases. • Income from certain investments made by foreign funded pension plans whenever the funds are exempt from taxes in their home country, and these funds are registered. 15 • Capital contributions or repayment by shareholders of losses sustained by a corporation. • Premiums charged upon the issuance of new shares. • Income recognized for financial purposes by using the equity method for valuing shares of investee corporations. • Income recognized for financial purposes as a result of revaluing assets or capital to recognize the effects of inflation.

Doing Business in Mexico 2015 137 Deductions Deductions of corporations are a matter of legislative grace, and many specific rules or limitations are established in the tax law and its regulations. The principal requirements and restrictions are described below. General requirements The general requirements for deductibility are as follows: • Deductions should be for expenses considered as strictly indispensable for the conduct of the business, except for charitable contributions. They should be adequately documented by supporting evidence, in the name of the taxpayer, other than credit card charge notes, and duly recorded in the accounting records. • Invoices supporting expenses and the acquisition of fixed assets must be printed by officially authorized printing houses and must satisfy a series of very strict requirements. For example, the tax registration number of the client must be shown, and if the payments are for items subject to VAT, the amount of such tax must be shown separately on the bill. We should note that there is a strict procedure for requesting and allowing companies with certain controls to self-print invoices that comply with the above requirements. • Deduction exceeding Ps 2,000 paid via electronic fund transfer must be made from accounts in the name of the taxpayer. Salary payments exceeding $2,000 must be made through the financial system. . Provisions for estimated expenses, such as severance pay, vacation and accrued expenses in general, are not deductible until actual payments are made. • Generally, all requirements for any particular deduction must be satisfied no later than the last day of the year to which the deduction applies, although the invoice supporting the expense may be provided up to the date on which the tax return for the period in question is filed. An invoice received for an item constituting an expense, must contain a date within the year for which the deduction is claimed. However, payments of fees and rent to individuals may be deducted only when actually paid within the taxable year. Amounts representing taxable income to individuals should have been actually paid and payment of the withholding tax on taxable income of individuals or foreign corporations must be proved. • Payments to foreign corporations (e.g. royalties, interest) are only deductible when withholding obligations are satisfied. Supporting documentation should be issued and preserved. • For the deduction of salaries and wages, the corresponding tax should be withheld and paid, social security and welfare payments should be made, tax returns should be filed and the employees must be registered in the Federal Taxpayers Registry. • Contributions made to pension and retirement funds as well as disbursements for remunerations qualifying as exempt income for employees (welfare dues, savings funds, severance pay, annual bonuses, overtime, vacation and Sunday premium, among others) are deductible at the rate of 53%. The deduction will be 47% when the taxpayer varies exempt employee benefits from one year to the next. Business expenses As noted above, all “strictly indispensable,” fully documented business expenses are deductible, with the restrictions, exceptions and special requirements for specific expenses noted in each case below.

138 Tax and Legal Services - PwC Mexico Deduction of doubtful accounts Losses on uncollectible receivables are deductible if the statute of limitations for enforcing collection has expired, or earlier if the accounts can be proved to have become obviously/practically uncollectible. For relatively substantial balances to be deductible, the existence of bankruptcy or other legal proceedings is normally required. Estimated provisions for bad debts are generally not deductible. Banks may no longer deduct the creation of or increases in the global preventive reserve as from 2014. They may only deduct doubtful accounts when the portfolio is written off, as per the provisions established by the National Banking and Securities Commission (NBSC). Doubtful accounts arising from the creation of or increase in global preventive reserves that have been deducted by the bank in the terms of the 2013 law are not deductible. In this regard, banks must control the balance of the global preventive reserve at December 31, 2013 so that cancellations of the reserve not corresponding to write-offs ordered or authorized by the NBSC must be included in taxable income. Excess global preventive reserves still non-deducted at December 31, 2013 may: 1. Be subtracted from the taxable income specified in the preceding paragraph. 2. Be deducted in each period up to the amount of the difference between 2.5% of average loans for the period and the losses arising from uncollectible loans deducted in the period, although this in no case implies duplication of the deduction. Once excess global preventive reserves have been deducted, the bank may deduct quit claims, pardons, rebates and discounts on current loans, as well as losses on the sale of the portfolio and payments in kind, except those conducted between related parties, provided this does not give rise to a double deduction.

Cost of goods sold 15 As was explained in the “Inventory Valuation” section of this chapter, from 2005 onwards the deduction for merchandise purchased was replaced by a deduction for the cost of goods sold. Several inventory accounting methods are acceptable to determine the cost of goods sold. Depreciation and amortization The income tax law permits the deduction of the costs of investments in tangible property or intangible assets only through annual charges for depreciation or amortization. The straight-line method, without recognition of estimated salvage values, is the only acceptable method for tax purposes. Depreciable costs are defined as including not only the purchase price of the assets but also freight and handling charges, insurance, commissions, fees, customs duties, and taxes, except value-added tax,, which is handled as described in Chapter 23. Maximum rates of depreciation and amortization are shown in Appendix II. In general, all types of fixed assets except land are depreciable for tax purposes, as long as they can be shown to have been acquired for the business purposes of the corporation itself. Depreciation of personal residences and ships or airplanes not licensed for commercial use may be deducted only if specific authorization is secured, based on factual evidence that such assets are necessary for the conduct of corporate activity. Depreciation of recreational property is prohibited.

Doing Business in Mexico 2015 139 Intangibles other than goodwill may be amortized at the rates shown in Appendix II. Different methods of depreciation, as well as different straight-line rates, may be used for financial purposes. The rates used for tax purposes may be less than the legal maximum straight-line rates but, once adopted, may be changed only once in a five-year period. A second change within five years may be made only in special circumstances, such as in the case of a merger. Depreciation may commence in the fiscal year in which the assets are placed in use or in the following year, at the election of the taxpayer.

Vehicles Depreciation of automobiles is restricted to Ps $130,000. All the expenses related to the care and maintenance of vehicles, as well as losses sustained on their subsequent sale, will also be deductible in the same proportion that this ceiling bears to the total cost of the vehicle. Vehicles must be strictly indispensable for the business and used solely for business purposes.

Indexation of depreciation expense Straight-line depreciation computed at the rates specified by the law, based on the estimated useful lives of the different types of assets, may be increased by the application of the percentage increases in the National Consumer Price Index since the month of acquisition of the asset. Also, specific annual depreciation rates are established for certain industries. When an asset is disposed of or becomes useless the remaining undepreciated historical-cost basis may also be deducted after application of the appropriate adjustment factor. The immediate deduction of fixed assets in force up to 2013 has been eliminated. Therefore the general rules for the straight-line method are applicable, as described above, except for machinery and equipment for generating electric power from renewable sources or from efficient electricity cogeneration systems, as well as facilities for special-needs persons, which continue to be entitled to a 100% straight-line deduction.

Leasehold improvements Leasehold improvements are depreciable by the lessee in accordance with the depreciation rates established by the tax law (in general, at 5% per year). If the related leases are effectively terminated before the leasehold improvements are wholly depreciated, the undepreciated balance will be deductible by the lessee. When leasehold improvements become the property of the lessor upon termination of the lease, the lessor will be required to include the appraised value of such improvements as taxable income. Lease agreements Assets acquired under so-called financial leases are treated as purchases subject to depreciation. The related contracts must specify the value of the property being leased and the amount of interest due under the contract. Consequently, the lessee must capitalize precisely that amount as an asset for depreciation purposes and consider the balance as interest expense, deductible as accrued. Amounts paid under an operating lease are generally deductible in full.

140 Tax and Legal Services - PwC Mexico Depletion Exploration and development expenses and the cost of mining claims incurred prior to the commencement of commercial operations of a mine are treated as pre-operating expenses, which are amortizable at 10% per annum. Tangible fixed assets of mining companies are generally treated as depreciable assets. There is no percentage depletion allowance. Interest Interest on loans can be deducted if the proceeds of the loans have been invested in the business of the company and proper withholding taxes, if applicable, have been paid. Deductions for interest expense may be partially or wholly disallowed if a company makes non-interest-bearing loans to third parties or if such loans bear interest at rates lower than those paid by it. The amount disallowed may not exceed the amount of additional interest that should have been charged to the borrower, calculated on the basis of the average interest rate paid by the company on its loans. Also, very broad rules classifying loans as back-to-back loans result in the disallowance of interest deductions. In addition, thin capitalization rules result in the disallowance of interest expense for highly leveraged companies.

Correction for inflation Mexican corporations have to determine an annual income adjustment and a deductible loss for income tax purposes, by applying the percentage increases in the National Consumer Price Index to essentially all monetary assets, including bank balances and investments (except in shares). Even though Mexican inflation has been significantly reduced in recent years, highly leveraged companies may have restrictions on the deductibility of their interest expense and foreign exchange losses as a result of the inflation adjustment. Because of this monetary correction, investors should evaluate the negative effects of financing their 15 operations in Mexico through debt instead of equity.

Thin capitalization rules Interest generated by excess debt coming from a related party is non-deductible for income tax purposes if the amount of debt is more than three times the shareholders’ equity (3-to-1 debt-to-equity ratio), according to the taxpayer’s balance sheet. All liabilities are considered for purposes of calculating the disallowed interest expense amount in determining the annual average liabilities (in 2005 and 2006, the Mexican Income Tax Law appeared to refer solely to liabilities arising from loans). Certain liabilities may be excluded if certain requirements are met. In general, the thin capitalization rule still includes the possibility of taxpayers applying for a ruling from the Mexican tax authorities allowing them to apply a higher leverage due to the characteristics of their activities (higher than the 3 to 1 debt-to-equity ratio). Also, the thin capitalization rules still do not apply to the financial sector. In addition, as from 2007, a provision grants the possibility of the taxpayer using, instead of its shareholders’ equity, the sum of the average balances of the capital contributions account (CUCA) and the after-tax earnings account (CUFIN) to determine the 3 to 1 debt-to-equity ratio. The taxpayers that opt for this calculation must continue using it for at least five years. This alternative computation is mandatory for those taxpayers that do not account for capital following Mexican Financial Reporting Standards.

Doing Business in Mexico 2015 141 Royalties, service fees and Technical assistance Royalties paid to foreign licensors are deductible if the appropriate taxes are withheld and certain other requirements are met. In order to be deductible, such payments must be made directly to companies having the required technical capabilities, and should correspond to services actually received. In the event of a tax audit inspection, the authorities may request documentation proving that technical assistance services were effectively received. The withholding rates on foreign royalties are shown in Appendix V. Payments to residents outside Mexico for technical assistance or know-how, including royalties for these items, are deductible only if the corresponding fees are paid for services or know-how actually received, not merely for the right to receive services or know-how, and the payments are made to companies that directly provided the service using their own technical resources and staff. However, if the service provider is a taxpayer in Mexico, that service provider is permitted to subcontract technical assistance to third parties. Royalties are considered to include payments for the temporary use of patents; invention or improvement certificates; trademarks; trade names; copyrights on literary, artistic or scientific works, including movies, films and recordings for radio or television; as well as designs or models, plans, formulas or industrial, commercial or scientific procedures; commercial, industrial or scientific equipment; as well as amounts paid for the transfer of technology or information relative to industrial, commercial or scientific experiences or other similar rights or property. The temporary use of copyrights on scientific works also includes software programs. Royalties are also considered to include payments made for the right to receive visual images, sounds or both for retransmission, or payments made for the right to permit public access to such images or sounds, when they are transmitted in either case by satellite, cable, fiber optics, or other similar means. Payments for technical assistance are not to be considered as royalties. Technical assistance is the rendering of independent personal services whereby the provider agrees to furnish non-patentable knowledge, which does not imply the transmission of confidential information relative to industrial, commercial or scientific experiences, and agrees to take part in the application of said knowledge. It is very important to consider whether pure technical assistance services may be afforded a different tax treatment under the terms of a tax treaty with another country. The 2014 tax reform introduced new rules which consider the Base Erosion and Profit Shifting (BEPS) plan and guidelines announced by the Organization for Economic Co-operation and Development, under which a number of expenses are not deductible, among others. 1. Interest, royalty or technical assistance payments made to a party resident abroad that controls or is controlled by the taxpayer, when: a. The company receiving the payment is considered to be transparent, except when the operation is carried out at market value and its stockholders or associates are subject to income tax on income received through the company located abroad. b. The payment is considered to be nonexistent (disregarded) for tax purposes in the country in which the foreign party is located. c. The recipient does not include the payment as part of its taxable income under the rules of its jurisdiction.

142 Tax and Legal Services - PwC Mexico d. Payments that are also deductible for a related party resident in Mexico or abroad, unless the related party includes income generated by the taxpayer in its own taxable income, in that period or in the following period. Employee remuneration All types of remuneration paid to an employee, as well as benefits paid for the employee’s account that do not qualify as tax-free fringe benefits, mentioned below, must be considered in calculating the monthly income tax withholding required for all employees. There are no specific limits on payments to employees, as long as normal payroll taxes and income tax withholdings are paid. Social Security dues payable by employees but paid by the employer are no longer deductible.

Fees and other payments for services Fees and payments to administrators, general managers, directors, and statutory auditors (comisarios) are deductible expenses only if determined as specific amounts and comply with the following requirements. • Annual amount paid to each person may not be larger than the salary of the principal officer of the company. • Total of such payments may not be higher than the total salaries paid and may not exceed 10% of the total of all other deductible expenses of the company. Moreover, the company is obligated to withhold personal income tax according to the income tax table for resident employees (up to 30%), unless the recipient is also an employee. Fees of this type paid to non-residents by a company domiciled in Mexico are considered Mexican-source income even if paid outside Mexico. These fees paid to non-residents are subject to a flat 25% income tax withholding rate.

Travel, gifts, meals, and entertainment Reimbursements to employees for travel expenses incurred in areas that are more than 15 50 kilometres from the employee’s base office are deductible (up to certain limits discussed below) and are not considered taxable personal income of the employee if proper supporting evidence is obtained from third parties, such as suppliers of transportation, meals and lodging. The employer must be able to prove a business purpose for the trip involved should pay by means of a credit or corporate card and is obligated to inform the tax authorities if such expenses are over a certain amount. The cost of meals incurred as a traveling expense is deductible only if the related transportation or lodging expenditure vouchers are attached to the meal vouchers. Furthermore, there are daily per-person ceilings for meals of Ps750 for domestic expenses and Ps1,500 for expenses incurred abroad. In addition to the ceilings on meals deducted as travel expenses, the following travel expense ceilings also apply: • Rental cars: Ps850 per day. • Lodging: Ps3,850 per day for trips outside Mexico. • Seminars and conventions: If the related fee includes all or part of the traveling expenses and these are not shown separately, only an amount equal to the daily deductible meal allowance may be deducted (see above).

Doing Business in Mexico 2015 143 Deductions for entertainment expenses are not permitted and business gifts or favors to customers are deductible only if they are directly related to sales or services and are offered on a general basis. Business mileage reimbursements are deductible if certain requirements are met, but monthly allowances for the use of personal cars and per diem living allowances are not deductible unless they are treated as taxable wages of the individual employees. Investments in and expenses of private corporate dining rooms (i.e., those not available to all of the company’s employees) are not deductible.

Pension funds Contributions to funded pension plans can be deducted if certain requirements are met, such as that the funds be placed in trust with a Mexican bank for investment in approved securities (30% in government obligations), specific calculations should be made, annual provisions should be made at rates determined by a Mexican actuary and all or large segments of the employee workforce must be covered by the plan after a reasonable eligibility period.

Savings funds Contributions by employers to employee savings funds are considered welfare expenses and are subject to the general rules and limitations for this type of deduction, described below. In addition, the regulations establish specific rules, some of which are mentioned below, in order for such contributions to represent deductible expenses for the employer and for payments from the fund to be tax exempt to the employees. Employer contributions may not exceed 13% of each individual’s salary, up to 1.3 times the annual general minimum wage for the region where the employee works. Employees may formally withdraw these savings only upon separation or once each year; these withdrawals are generally tax free to the employee. Employees are also permitted to request loans from these funds once a year. The fund is only allowed to invest in securities approved by the National Banking and Securities Commission. The rules of the fund may also provide for contributions by the employee on a pretax basis. The above withdrawal rules apply for employee contributions. If employee contributions are for the same amount as contributed by the employer, the employer contributions are not considered as part of the salary for social security and workers’ housing contribution purposes.

Welfare expenses Payments for welfare expenses must be for benefits or services offered to employees on a general basis. The tax treatment of welfare expenses is different if the employees are members of a union or not. For those unionized workers, fringe benefits and welfare expenses should be contained in the collective labor agreement in order to be deductible. For those workers not part of a union, welfare expenses should be the same for all workers. Otherwise, they could be considered to represent taxable income of the specific individuals benefited. The taxpayer should establish definite plans providing periods and requirements of a general nature as the means of determining the group of employees who qualify for the benefit, requirements for qualification, specific beneficiaries, and the procedures for determining the amounts of the benefits. The expenses that may be considered deductions as social welfare expenses are limited to payments of pensions, death benefits, disability compensation, medical and hospital services, scholarships for workers or their children, savings funds, child-care centers,

144 Tax and Legal Services - PwC Mexico cultural and sports activities, and activities of a similar nature. The regulations contain detailed rules limiting the deductions for what are classified as welfare expenses. Benefits granted to employees holding positions of trust on a general basis may not be proportionately larger than those granted to other employees. The regulations also establish an overall limitation on deductible benefits to employees holding positions of trust by means of a provision to the effect that if the percentage of the total benefits authorized to such employees in relation to their total base salaries exceeds the percentage authorized to the other employees, the excess cost will not be a deductible expense to the company. For those employees who are not members of a union, the deductible amount of welfare expenses should not be higher than ten times the yearly minimum salary, without including social security quotas, savings, pension and retirement fund payments, medical expenses and life insurance premiums. There is a limitation on the exemption from tax of social welfare benefits granted in the form of disability subsidies, educational scholarships, day-care centers, cultural activities, sports, and other activities of a similar nature. Whenever the sum of salaries and social welfare benefits of the above types exceeds an amount equivalent to seven times the minimum wage of the economic area of the taxpayer, all such social welfare benefits in excess of one annual minimum wage are taxable to the employee, and the employer should consider any such amounts in making personal income tax withholdings. Under no circumstances will the social welfare benefits be taxable if their amount, together with other regular compensation, does not exceed seven times the minimum wage. This limitation is applicable only to the specific types of benefits mentioned above and does not apply to other types of benefits, such as the contributions made by the employer to employees’ savings funds, pensions or allowances for medical expenses. 15 As previously mentioned, starting in 2014 those items paid and granted by the employer are subject to a 53% maximum deduction if the expenses qualify as exempt benefits for the employees. Insurance premiums Premiums for life insurance payable to the heirs of employees can be deducted if all or large segments of the employee workforce are covered. The cost of key personnel insurance payable to a company is also deductible. Intercompany charges In order to be deductible for a Mexican taxpayer, charges for management fees by foreign or local companies, whether or not affiliates, should meet the test of being “strictly indispensable” for the conduct of the business. In order to be deductible, intercompany charges should also meet with arm’s length criteria. Charges from a foreign affiliate for a pro rata share of general and administrative expenses or research and development costs are not deductible, except in the case of branches or other permanent establishments of foreign corporations (see “non- deductible items” below). Foreign exchange Foreign exchange gains or losses are treated as additional interest income or expense, as discussed above under “Inflationary gain or loss.”

Doing Business in Mexico 2015 145 Other deductions Donations Deductible contributions are restricted to those actually made within the fiscal year to the federal, state or municipal governments, legally authorized charitable or cultural organizations or scientific and technological research institutions appropriately registered as such. Donations to private non-profit and public educational institutions are also authorized when the recipient institution has the recognition required by federal education laws and the payments are not for services. These deductions are limited to 7% of the taxable earnings for the period, for both entities and individuals. However, any donations made to the federal government, federal entities, municipalities and their decentralized organisms may not exceed 4% of said profit or earnings.

Value-added tax Since, in general, Value Added Tax (VAT) is not an expense except to the final consumer, payments of VAT charged by suppliers or paid directly on imports are not deductible unless the corporation does not have the right to credit the payments against the tax on its own activities or to obtain refunds thereof and such payments relate to deductible expenses or purchases subject to depreciation for tax purposes. In essence, VAT is deductible only insofar as it relates to purchases of goods and services for activities that are exempt from VAT, rather than those activities subject to the zero rate of tax (see Chapter 22). Nondeductible items In addition to deductions that do not comply with the above general requirements, the following items are not considered deductible expenses: • Corporate income tax, as well as the minimum tax on assets. • Payments of taxes levied on other taxpayers, such as withholding taxes for payments to foreigners. • Amounts that may be considered as participations in the profits of a taxpayer or that are based on the realization of profits, whether paid to employees, directors, creditors, or others. • Allocations of overhead and general and administrative expenses of the home office are deductible (as determined under Mexican tax rules) in the case of a Mexican branch or other permanent establishment of a foreign corporation. However, in the case of subsidiaries or affiliates, these pro rata allocations are non-deductible. • Goodwill or its amortization. • Losses arising from the merger, reduction of capital stock or liquidation of corporations in which the taxpayer has acquired shares. • Entertainment expenses and most business meals, as discussed earlier in this chapter. • Fines or indemnities for damages resulting from actions for which the taxpayer is responsible. However, taxpayers are permitted to deduct penalty interest assessed by the tax authorities. • Operating expenses or the cost of personal residences, ships or airplanes not licensed for commercial use except as may be specifically authorized under the regulations. In the case of automobiles and aircraft, operating expenses will be deductible only in the proportion which the deductible amount of the investment (Ps130,000 maximum depreciable basis) for automobiles bears to the total cost of the vehicle.

146 Tax and Legal Services - PwC Mexico • Payments made to any type of person or legal entity or contract located in a PTR, unless the taxpayers can demonstrate the transaction was carried out at fair market value. Losses Carry back or carry forward An operating loss declared for tax purposes can be carried forward and deducted from otherwise taxable profits of the ten subsequent years. Such deductible loss carried forward will also be indexed (increased) for inflation. Operating loss carry back are not allowed. Losses carried forward may be increased by the percentage increase in the National Consumer Price Index between the seventh and twelfth months of the fiscal year in which they are incurred, and thereafter up to the sixth month of the fiscal year in which they are applied. Tax loss carry-forwards are a right of the specific taxpayer and cannot be transferred to another entity. In the case of mergers, operating loss carried forward of the merged entity are lost, and in the case of carry forward of the surviving entity certain limitations apply. In the case of a spin-off, tax loss carry forward can be divided between the surviving entity and the spun-off entity(ies) in proportion to: a. The inventories and accounts receivable transferred in the case of commercial entities; b. The fixed assets transferred, in all other cases.

Tax computation Net income 15 Net income for tax purposes is defined as the difference between taxable revenues and allowable deductions. The operating loss carryover from prior years and profit sharing paid may be deducted from net income to arrive at taxable income, to which the tax rate is then applied. See Appendix III for a sample tax calculation. Tax rates The corporate tax rate is 30% for 2014. Lower rates may apply to certain primary economic activities. Tax credits A foreign tax credit is allowed for income tax paid directly or indirectly in foreign countries on foreign-source income, as described in Chapter 18. In addition, a credit is provided for investing in qualifying film production activities. Consolidation As from 2014, the tax consolidation regime has been eliminated. However, the regime remains in place for groups that opted to consolidate as from 2010 and have therefore been consolidating for less than five years, with the obligation to deconsolidate when the 5-year period elapses.

Doing Business in Mexico 2015 147 Companies obliged to deconsolidate have three options for determining and paying the deferred tax in consolidation. In general terms, there is a 5-year schedule for payment of this liability. New optional regime for groups of companies The tax consolidation regime will be replaced by a new optional regime under which tax payment is partially deferred over a three-year period. Each company will determine its tax on the basis of a consolidated tax result factor. That factor is determined by dividing the consolidated tax result by the sum of the consolidating portion of the positive tax results of the companies of the group. The consolidated tax result for the period is determined by adding the tax results of the companies of the group and subtracting the tax losses of the remaining companies of the group (all in the consolidating portion). The consolidating portion is determined as follows: 1. The consolidating portion of the controlled companies is the average daily direct or indirect shareholding of the controlling company in the controlled companies during the period. 2. For the controlling company, the consolidating portion is 100%. The controlling and controlled companies must pay restated deferred income tax on the same date on which they are required to file the return for the period following that in which the three-year period concludes. Requirements for controlling companies A controlling company opting for this regime must: 1. Be an entity resident in Mexico. 2. Directly or indirectly hold more than 80% of the voting shares of one or more controlled companies. 3. In no case may more than 80% of their voting shares be directly or indirectly owned by one or more companies, unless those companies are resident in the country with which Mexico has signed an exchange of information agreement. A transitory provision of the law establishes that the controlling company has until December 31, 2014 to ensure that it directly or indirectly holds 80% of the voting shares of one or more controlled companies in order to remain within the optional regime. If that percentage is not complied with by December 2014, the controlling company must see that the company in question is withdrawn from the regime (considering the withdrawal date to be January 1, 2014), and the controlling company is required to pay deferred income tax in provisional payments for the period, plus restatement and surcharges calculated as from the date those payments should have been made to the date on which they are actually made. As concerns groups consolidating at December 31, 2013, the controlling company must file a notification by February 15, 2014 notifying the authorities that it will opt for the new regime. Any companies with tax losses unamortized at December 31, may join the new regime but may not apply said losses nor combine their tax results until the tax losses are fully utilized.

148 Tax and Legal Services - PwC Mexico Groups not consolidating at December 31, 2013 must file a request by August 15, 2014 to join the new regime, in which case, they may opt to apply the regime as from 2015. Corporate reorganizations Mexican law no longer provides for tax-free reorganizations when non-Mexican entities are involved. However, the tax authorities may authorize the deferral of taxes that would otherwise be triggered by the transfer of shares through a reorganization of companies belonging to the same group, such as mergers and corporate spin-offs. The authorization must be obtained prior to the share transfer. The tax deferred is determined considering an arm’s length price. This tax, adjusted for inflation, is payable upon the sale of the originally transferred shares outside the same economic group. An economic group consists of companies 51% or more of whose voting shares are held by the same ultimate parent company. The representative is jointly liable for the tax on the sale of shares, even when a statutory report is issued by a public accountant. In principle, such authorizations for deferral are not granted if the party acquiring or selling the shares is a resident of a tax haven or of a country that has not signed a broad exchange of information agreement with Mexico. However, in the latter case, an authorization may still be granted if the taxpayer provides documentation to the Mexican tax authorities stating that the taxpayer has authorized the foreign tax authorities to provide information to the Mexican authorities regarding the transaction for tax purposes. If the sale of shares qualifies as an exempt reorganization under tax treaty rules the non-resident must appoint, prior to the sale, a legal representative in Mexico and file a notice with the Mexican tax authorities informing them of such appointment and the details of the reorganization process intended to be effected. Additionally, certain formal requirements have been established in the Regulations of the Mexican Income 15 Tax Law that must be complied with when carrying out this type of transaction. Tax treaty provisions may be applied in lieu of domestic law rules when the seller resides in a tax treaty country. (See Chapter 17 for further discussion of taxation of reorganizations).

Other taxes Value-added tax A Value Added Tax (VAT), discussed in more detail in Chapter 23, is payable at the general rate of 16% on sales of goods and services, as well as on rents and imports of goods and services. Medicines and food products are subject to VAT preferences, as discussed in Chapter 23. Excise tax Mexico imposes excise tax on certain products and services. See Chapter 13 for more details.

Doing Business in Mexico 2015 149 Mandatory profit sharing Every business concern with employees is required to distribute a portion of annual profits among all employees, irrespective of its form of organization. The amount distributable to the employees in most cases amounts to 10% of taxable income. As discussed under “Profit sharing” in Chapter 10, special rules apply to a limited number of specific businesses. Profit sharing is deductible from taxable income or added to tax losses.

Branch versus subsidiary Except as noted below, from an operational viewpoint, there is no significant difference in operating through a branch or through a subsidiary of a foreign corporation. However, branches may now represent a disadvantage since the branch profits tax (which is equivalent to the 10% dividend tax) is payable on a yearly basis and tax treaty reductions to the rate may not apply. Remittances (i.e. royalties, fees, commissions, services, or interest payments) made by a branch or other permanent establishment of a foreign corporation to its head office abroad are not deductible by the branch, although they would continue to be subject to any applicable withholding taxes. It should be noted, however, that branches and other permanent establishments of foreign corporations which, are located in a country with which Mexico has concluded double tax treaty, are allowed to deduct pro rata allocations of home office expenses. This deduction is not available to subsidiaries of foreign corporations. Also, certain prorated expenses of the home office paid to third parties are subject to withholding taxes. Lastly, it is important to consult with competent legal counsel on the non-tax responsibilities assumed by the home office when operating as a branch, these may include product liability, legal liability, etc.

Special industries Coordinated entities managing and operating fixed assets and land directly or indirectly related to freight or passenger transportation may continue to comply with their tax obligations through the entity, on the basis of the rules for individuals engaged in business operations. The tax authorities may grant facilities of an administrative and evidence of compliance facilities of up to 4% of their income, and as concerns the evidence of compliance facility, it may be established that tax not exceeding 17% must be withheld from amounts disbursed. Agricultural, cattle breeding, forestry and fishing activities, applicable to taxpayers engaged exclusively in that sector, with tax determined as follows: a. Entities will have an exemption on an amount equivalent to 20 times the general minimum wage for the geographic area corresponding to the taxpayer, calculated per year for each member, not to exceed 200 times the general minimum wage for the Federal District. b. Individuals will have an exemption of an amount equivalent to 40 times the general minimum wage for the geographic area corresponding to the taxpayer, calculated for the year.

150 Tax and Legal Services - PwC Mexico c. Entities and individuals with income of up to an amount equivalent to 423 times the general minimum wage for the geographic area of the taxpayer, calculated for the year, will have the aforementioned exemptions, as well as a reduction of tax on the excess, i.e., 40% for individuals and 30% for entities, that is to say, they will apply the effective tax rate of 21%. d. Individuals and entities with income exceeding an amount equivalent to 423 times the general minimum wage for the geographic area of the taxpayer, calculated for the year, apply the above-mentioned exemption and the tax deduction and must determine and pay tax at the rate of 30% or at the rate applicable for calculating tax payable by individuals. Insurance companies The various types of insurance and bonding companies are allowed to deduct certain asset valuation and technical reserves, established on the basis of the instructions or with the approval of the National Insurance and Bonding Commission. Holding companies Dividends received by Mexican companies that own the shares in other Mexican companies are not includable in taxable income. However, such dividend income is subject to obligatory profit sharing (see “Profit sharing” in Chapter 10), which would therefore be duplicated in respect of dividends received from an operating company if the holding company has employees of its own.

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Doing Business in Mexico 2015 151 Preferred Tax Regime List

Anguilla Kingdom of Swaziland Republic of Mauritius Antigua and Barbuda Kingdom of Tonga Republic of Nauru American Samoa Kiribati Republic of Panama Aruba Labuan Republic of Trinidad and Tobago Ascension Macao Republic of Tunis Azores Islands Madeira Republic of the Marshall Islands Barbados Malta Republic of the Seychelles Belize Montserrat Republic of Vanuatu Bermuda Most Serene Republic of San Marino Republic of Yemen British Virgin Islands Netherlands Antilles Saint Helena Brunei Darussalam Nevis Saint Kitts Campione D'Italia Niue Saint Lucie Canary Islands Norfolk Island Saint Pierre and Miquelon Islands Cape Verde Republic Oriental Republic of Uruguay Saint Vincent and the Grenadines Socialist Democratic Republic Cayman Islands Ostrava Free Zone of Sri Lanka Channel Islands (Guernsey, Jersey,Alderney, Great Sark, Herm, Little Pacific Islands Solomon Islands Sark, Brechou,Jethou, Lihou) Christmas Island Patau Special Zone of the Canary Islands Cocos-Kelling Islands Pitcairn Island State of Bahrain Commonwealth of Dominica Principality of Andorra State of Kuwait Commonwealth of the Bahamas Principality of Liechtenstein State of Qatar Cook Islands Principality of Monaco Sultanate of Oman Falkland Islands Qeshm Island Svalvard Archipelago Free Associated State of Puerto Rico Republic of Albania Tokelau French Polynesia Republic of Angola Trieste Gibraltar Republic of Costa Rica Tristan da Cunha Granada Republic of Cyprus Turks and Caicos Islands Greenland Republic of Djibouti Tuvalu Guam Republic of Guyana United Arab Emirates Hashemite Kingdom of Jordan Republic of Honduras U.S. Virgin Islands Republic of Liberia Western Samoa Isle of Man Republic of the Maldives

152 Tax and Legal Services - PwC Mexico Chapter 16 Taxation of foreign corporations

Investor considerations • As from 2014, dividends paid out from a Mexican Company are subject to a 10% withholding tax for foreign corporations. Under certain treaties, this rate could be reduced. • A similar 10% corporate tax is applicable to profits generated by a Mexican branch (permanent establishment) of a foreign entity. Under certain treaties, this rate could be reduced. • The dividend tax does not apply to profits generated prior to 2014. Separate accounts are needed for pre 2014 and post 2013 CUFIN to apply this benefit. • Branches are taxed in the same way as corporations, except that payments for interest, commissions, royalties, or fees to the home office of the same legal entity are not deductible. However, some branches may deduct reasonable allocations of home office expenses. Mexican tax law generally follows the OECD model treaty definition of a permanent establishment. • Sales people or agents with authority to execute contracts constitute a taxable permanent establishment. • Goods held in bonded warehouses within Mexico do not constitute a permanent establishment. The Mexican customer is considered the importer at the time goods are released from the warehouse. • Liaison or representative offices can operate tax-free in certain 16 circumstances. However, if they employ local personnel, they are subject to normal payroll obligations. • Mexican-source income that is not connected with the conduct of business through a permanent establishment is generally subject to specific withholding tax rates, although tax treaties reduce or eliminate withholding taxes in some cases.

Doing Business in Mexico 2015 153 Tax concepts Separation of business and nonbusiness income Mexican income tax law contains specific rules for the taxation of Mexican-source income of non-resident foreign corporations and individuals. For tax purposes, Mexican- source income of non-resident corporations and individuals may be divided into the following general categories: • Income of Mexican branches of foreign corporations or income attributable to what are classified as permanent establishments for income tax purposes in Mexico—Income is taxed under similar rules as those applicable to Mexican corporations. • Mexican-source income not arising from branches or permanent establishments—This income is usually taxed at a flat rate applied on a withholding basis to the gross income without deductions of any kind, as discussed below, except in a limited number of cases when a higher rate of tax can be applied to net income if the non-resident meets specific residency requirements and has appointed a duly qualified representative in Mexico. For income from personal services rendered in Mexico, see Chapter 20

Imports Sales from outside Mexico Except in the case where a permanent establishment of a foreign resident is deemed to exist as described below, Mexico treats international sales to a resident of Mexico that legally imports the goods as sales completed outside Mexico. Accordingly, foreign corporations exporting merchandise through direct sales to Mexican customers are not subject to Mexican taxation. In these cases, the goods are imported by the customers and will normally be subject to import duties and value-added tax, but these are obligations of the Mexican importer. Sales of merchandise or other assets within Mexico Foreign residents are taxed on sales in Mexico in two general cases, as follows: 1. When the foreign corporation has a registered branch or permanent establishment for income tax purposes in Mexico—Sales within Mexico made by the head or other foreign office will be attributed to the Mexican establishment. Moreover, foreign residents who own merchandise on consignment in Mexico for sale in Mexico are generally considered to have a permanent establishment in Mexico for income tax purposes and therefore are subject to Mexican income tax on their profits from such sales. However, certain tax treaties that Mexico has in effect with other countries permit the maintenance of inventories solely for delivery. A non-resident is allowed to maintain inventories in a bonded warehouse for delivery in Mexico. The ultimate Mexican importer is responsible for any customs duties or licenses (if applicable) and for the value-added tax upon withdrawal of the merchandise from the bonded warehouse. 2. When the non-resident directly or indirectly sells land or buildings located in Mexico, trust rights to such real property, shares of stock issued by Mexican corporations, or capital interests in non-stock companies domiciled in Mexico, the proceeds of these sales are considered Mexican-source income no matter where the sales take place.

154 Tax and Legal Services - PwC Mexico Branch operations A branch of a foreign corporation formally registered to do business in Mexico, as well as any other permanent establishment for income tax purposes, is in general taxed as a Mexican corporate business enterprise. Only income attributable to the branch itself is considered for tax purposes, except that, under a rule of attraction, sales of goods carried out in Mexico by the head office or other offices of the same legal entity must be considered income of the branch or other permanent establishment. Income may also be attributed to the permanent establishment to the extent that it participates in the expenses incurred to produce income in any other establishment of the same legal entity. It should be noted that if a foreign corporation has more than one branch or other unincorporated permanent establishment in Mexico, even in unrelated lines of business, a single annual return must be prepared that combines the income and deductions of all the establishments. Duly registered branches or other permanent establishments of foreign corporations in Mexico are allowed the deductions corresponding to their activities, whether incurred within or outside of Mexico, as long as they comply with the specific requirements of the income tax law and regulations, including expenses that represent reasonable allocations from the head office or other offices located outside of Mexico. Allocations are only allowed if the head office is a resident of a country with which Mexico has signed a tax treaty and the other foreign offices are in addition residents of a country with which Mexico has signed a “comprehensive exchange of information agreement”. On the other hand, remittances to such offices will not be deductible even when made in payment of royalties, fees, commissions for actual services, or interest on funds provided to the establishment in Mexico or for similar purposes. The cost of assets imported from the head office or other offices of the foreign taxpayer will be determined on the basis of the lower of fair market value or the amount declared for customs purposes. 16 Permanent establishment for income and flat tax purposes In accordance with the income tax law, any place in Mexico where business activities are partially or totally carried out, such as branches, offices, agencies, or mining exploration sites, regardless of the length of time involved, will be considered as a permanent establishment in Mexico for income tax purposes and subject to taxation as described above. The law also provides that if a foreign resident corporation or individual acts within Mexico through an individual or company that has and exercises power to sign contracts in the name of the foreign resident, involving business activities in Mexico other than activities referred to below, the foreign resident will be considered to have a permanent establishment for income tax purposes in Mexico as regards such activities even if they are not carried out in a fixed place of business. A non-resident is also considered to have a permanent establishment if it owns merchandise for resale in Mexico (other than that deposited in a bonded warehouse, as discussed above), or in the case of business activities carried out by a foreign resident through a trust, the premises in which the banking institution (i.e., the trustee) carries out such activities will be considered as the place of business of the foreign resident.

Doing Business in Mexico 2015 155 In addition to the cases where there is a power of attorney or there are inventories that are subsequently delivered on behalf of the non-resident, a permanent establishment of a non-resident will also be deemed to exist, even if there is no physical place where business is conducted, when a resident of Mexico (corporation or individual) on behalf of the non-resident does any of the following: • Keeps a stock of goods with which to make deliveries on behalf of the non-resident. • Accepts risks on behalf of the non-resident. • Acts under detailed instructions or under the control of the non-resident. • Carries out activities that from an economic point of view correspond to those of the non-resident. • Is compensated by guaranteed remuneration, independently of the results of the resident’s efforts, or • Carries out activities with the non-resident at prices other than those that would have been used by unrelated parties in comparable transactions. These situations have not been included in the definition of a permanent establishment in the tax treaties concluded by Mexico. In these treaties, Mexico uses a definition that is similar to that provided by the OECD model tax convention. A permanent establishment will also be deemed to exist when a foreign resident renders services of construction, installation, erection, or maintenance of buildings in Mexico, or of inspection or supervision related thereto, when such services last for more than 183 days duration. This treatment becomes effective on the 184th day. Nevertheless, if it is known at the time a contract is signed that the services will require more than 183 days; income for this type of work will be treated as earned by a permanent establishment from its inception. This treatment is of importance in determining the income tax obligations not only of the foreign company but also of any foreign residents employed in the work, as discussed in Chapter 20. The Mexican payer is generally required to withhold 25% of gross payments when the period is for less than 183 days. For more information on withholding taxes, see Appendix V. All branch operations are subject to prior authorization of the National Commission on Foreign Investment, but in most cases this is a mere formality. It is understood that this is the interpretation of the Commission and that the Commission generally authorizes establishments as branches of a foreign company although authorizations for construction of highways and railways tend to somewhat more complicated. Mexico has entered into tax treaties with several countries. In some cases the treaties provide a different time period for classifying a construction activity as a permanent establishment (e.g., six months or eight months) and generally do not provide withholding tax rates applicable during the period in which the foreign constructor does not have a permanent establishment in Mexico.

156 Tax and Legal Services - PwC Mexico Activities not constituting a permanent establishment The income tax law provides that a limited number of activities will not be considered as constituting a permanent establishment in Mexico. However, it is advisable to seek competent advice on whether the authorization of the National Commission on Foreign Investment is required. Such activities include the following: • Mere storage or exhibition of merchandise belonging to the non-resident at a specific location or the maintenance of inventories to be processed by another party. • Use of a place of business for the sole purpose of purchasing goods or obtaining information for the foreign resident. • Storage of goods in a bonded warehouse, described above. • Use of a place of business for the sole purpose of carrying out activities of a preparatory or auxiliary nature with respect to the business activities of the foreign resident. These include publicity, furnishing of information, scientific investigations, and preparations for placing loans or other activities of a similar nature. • Having goods in bonded warehouses (already mentioned), to the extent such goods are not released to third parties. • Foreign residents shall not be deemed to have a permanent establishment for any legal or financial relationship maintained with companies engaged in maquiladora operations to the extent a treaty for avoidance of double taxation is in force between Mexico and the country of the foreign resident and certain requirements established in the Mexican income tax law are met. Foreign residents shall not be deemed to have a permanent establishment for any legal or financial relationship maintained with companies engaged in maquiladora operations to the extent a treaty for avoidance of double taxation is in force between Mexico and the country of the foreign resident and certain requirements established in the Mexican income tax law are met. The obligations imposed by the value-added tax, social security and other laws, in addition to the normal income tax withholding from payments to employees and others, must be satisfied in the above cases also known as rep offices. 16 Transfer of branch profits In the case of branches and other permanent establishments of foreign corporations, as from 2014, a 10% tax which is final, is imposed to profit distributions made to the head office. Also, corporate income tax rate of 30% on a grossed-up basis applies to remittances from permanent establishments (except remittances representing return of capital invested in the branch) when such profits have not previously paid income tax.

Doing Business in Mexico 2015 157 In addition, the following tax rules apply to permanent establishments: • Procedures established for the determination of the balance of the net after-tax earnings account (CUFIN) or the capital remittances account (similar to the capital contributions account). These involve a procedure similar to that followed by Mexican corporations in determining the tax that may apply to dividend payments and capital reductions. • Remittances made to the home office for reductions of capital in Mexico are first considered to be from profits. Once these remittances exceed profits, the excess will be considered a reduction of capital. Any amount paid to the home office that does not arise from CUFIN or the capital remittances account results in additional income tax. This is payable at a 30% rate by the permanent establishment on a grossed-up amount arrived at by multiplying the total excess remittances by 1.4286 for 2014 Tax rates Branches and other permanent establishments of foreign corporations are taxed in the same manner as Mexican corporations. Therefore, the tax rate of 30% is applied to the income tax base, as described in chapter 15.

Income from subsidiaries Mexican-source income not arising from a permanent establishment Mexican-source income of foreign corporations that do not have permanent establishments for income tax purposes in Mexico or, if they do, whose income is not attributable to such establishments is taxed separately, generally through withholding taxes applied at source. The rules referred to in this section are applicable to foreign corporations and also apply to non-resident individuals if they receive Mexican-source income. Nature of income Foreign corporations are taxed on their Mexican-source income received in cash, kind, services, or credit. Payments made for the account of the foreign corporation are also subject to tax. This includes traveling expenses of foreigners rendering services. Any income tax due from the foreign corporation that is absorbed by the Mexican company making payments to it is specifically considered as additional taxable income of the foreign corporation. Tax withholding Mexican taxpayers making payments to residents of foreign countries or their representatives should withhold and remit the corresponding income tax (see Appendix V). These payments are generally considered as final payments of the income tax, with no further obligations on the part of the foreign corporation. There are a few cases where a foreign corporation is permitted to pay taxes on net income, provided it has a qualified representative in the country (see below). The withholding taxes become an obligation at the time payments to the foreign residents become due (whether or not payment is actually made) or when the payment is actually made, whichever happens first. In most cases, the amounts of tax due are generally required to be remitted to the tax authorities during the first 17 days of the following month.

158 Tax and Legal Services - PwC Mexico Election to be taxed on net income through a qualified representative in Mexico A foreign resident directly or indirectly selling real estate located in Mexico or shares issued by a company domiciled in Mexico, an individual receiving income from artistic or sporting events, foreign residents carrying out financial derivative operations, or foreign residents engaged in the construction business in Mexico may elect to be taxed on the net Mexican–source income in lieu of the withholding tax rates applicable on gross income. Among the requirements that need to be fulfilled to elect this method of taxation, the foreign taxpayer must have a qualified representative in Mexico that meets the following requirements: • Individual or company must be a resident of Mexico or a permanent establishment of a foreign entity. • Representative should retain the supporting evidence of the income and expenses for five years from the date the tax is paid. • Representative is jointly and severally liable for any tax deficiencies. In a stock transaction the election also requires that the seller not be a resident of a tax haven or a preferential tax regime country and that an independent accountant issue an opinion as to the propriety of the tax computation in conformity with the “net basis taxation” rules optionally available for stock transactions. Dividends Dividends paid by a Mexican company that exceed the after-tax earnings account (CUFIN) are subject to a corporate tax rate of 30% on a grossed-up basis. For this basis, the Mexican Income Tax Law establishes that the excess must be grossed-up, multiplying it by1.4286, prior to the calculation of the income tax. The tax will be payable by the company and will be creditable against its income tax liability of the year and the following two years, subject to certain limitations. See “Corporations and shareholders” in Chapter 15. In addition, individuals and foreign residents are subject to 10% tax on dividends or 16 earnings distributed by a Mexican company. The tax must be withheld by the companies distributing the dividends. The aforementioned tax is applicable only to profits arising as from 2014. Derived from such tax, a Mexican entity is required to maintain a CUFIN balance with earnings generated up to 2013, and open up an additional CUFIN account to record earnings generated as from 2014. (please note that when those two accounts are not handled separately, or when the aforementioned earnings are not identified, the earnings distributed are understood to be generated as from 2014). Interest Interest income is considered as Mexican-source income when the corresponding capital is placed or invested in Mexico or when the person who pays the interest is a resident or a permanent establishment in Mexico. The definition of taxable interest is somewhat broad and includes the following: • Earnings from loans or credit balances of all types. • Earnings from the public debt. • Earnings from bonds or debentures. • Other payments made which are related to the loan or credit balance (commission, guarantee fees, etc.)

Doing Business in Mexico 2015 159 The rates of tax on interest, payable on a withholding basis and applicable to the gross income in each case, are shown in Appendix V. In general terms, they range from 4.9% to 40%. A tax exemption is applicable to the following types of interest, among others. 1. On loans granted to the federal government. 2. When paid on a minimum three-year loan agreement granted by financial institutions that promote exports and are duly registered specially for this purpose (i.e., not a regular bank) with the Ministry of Finance. 3. On preferential loans granted or guaranteed by foreign financial entities to institutions authorized to receive tax-deductible donations in Mexico, provided these institutions use the funds for purposes consistent with their tax-exempt status and are properly registered Sales of shares or capital interests In the case of sales of shares or of capital interests in non-stock companies, Mexico continues to be considered the source of wealth if the issuing company is Mexican, regardless of where the sales take place. The tax payable, withheld at source, is 25% of the gross proceeds of the transaction, unless the foreign entity has a duly qualified representative in Mexico as described above and obtains a statutory tax audit report issued by a public accountant, in which case it may elect to pay generally at the rate of 35% on the taxable gain realized. If the foreign resident has a duly qualified representative in Mexico, he may elect to calculate the taxable gain by deducting from the sales proceeds the average cost of the shares sold, as adjusted by the change in the after-tax earnings account (CUFIN) of the issuing company, any unamortized tax losses, reimbursement of capital and any similar items, during the period the shares were held to the date of the current sales transaction, all adjusted for inflation. This election is available only if the foreign shareholder is not a resident of a country that is considered a tax haven (including countries that tax earnings on a preferential basis). Moreover, non-resident taxpayers are not allowed to deduct losses incurred in similar transactions. When the purchaser is also a foreign resident and does not have a representative in Mexico, the seller is obligated to pay the tax directly. Gains on sales carried out through the Mexican Stock Exchange are subject to a 10% tax, fulfilling certain requirements as established by the recent Mexican Tax Reform. The indirect transfer of Mexican shares is generally not subject to tax in Mexico, unless more than 50% of the book value of the shares of the non-resident company being transferred derives from real property located in Mexico. Real property located in Mexico is always a key factor that needs to be carefully analyzed, even under a tax treaty.

160 Tax and Legal Services - PwC Mexico Group restructuring The Mexican tax authorities may grant a ruling to defer the income tax arising from the sales of the shares of a Mexican company during the course of a corporate organization. Such authorization will only be granted prior to the restructuring and provided the following requirements are fulfilled: • The seller or the acquirer must not reside in a territory with a preferred tax regime or a country with which Mexico has not entered into an agreement for comprehensive exchange of information. • A legal representative must be appointed. • A tax report is filed with the Mexican tax authorities including specific formalities. In addition, the Mexican tax authorities require some additional information to be filed with the request for a ruling and the tax will only remain suspended while the shares remain within the same interest group Royalties, including technical services The source of income is considered to be Mexican when the assets or rights that produce the income are utilized within Mexico or when the payments are made by a resident or a non-resident having a permanent establishment in Mexico. The rates of tax payable on a withholding-at-source basis and applicable to the gross income received are shown in Appendix V. In general terms, the rate ranges from 5% to 40%. Short-term construction, installation and related services Earnings from short-term construction, installation and related services are considered to include income from construction work, installation, maintenance, and assembly; erection of buildings and structures; and inspection work or supervision related to such activity when the services involved are expected to last for less than 183 days. The source of income is 16 considered to be in Mexico when the work is carried out within Mexico. Tax will be payable on a withholding basis at the rate of 25% on the gross income unless, the foreign corporation has a qualified representative in Mexico, as mentioned previously. In this case the taxpayer may elect to pay tax at a 35% rate applied to the net profit obtained from the activity. This taxable profit will be determined by deducting from the gross income received the directly-related deductible expenses authorized for resident corporations, whether incurred in Mexico or abroad. When the taxpayer elects to be taxed on a net basis, the Mexican customer should be advised so that the 25% withholding will not be made, and the representative should pay the tax due with a tax return to be filed during the month following that in which the work is completed.

Doing Business in Mexico 2015 161 If the work should actually last for a period longer than 183 days, the foreign resident will be considered to have a permanent establishment for income tax purposes in Mexico as from that time and will be taxed as such thereafter, rather than by either of the special methods of taxation described above. An income tax return must be filed within three months after the end of each calendar year from the incorporation of the permanent establishment. Additionally, advance monthly tax payments must be made during the year following that of the constitution of the permanent establishment. When calculating the advance income tax payments, the permanent establishment must remain with the option chosen to determine its income tax prior to being considered as a permanent establishment (25% on gross income or 35% on net income). Moreover, if it is known at the time the work begins that it will require more than 183 days, for example, based on the contract terms agreed, the foreign resident will be considered to have a permanent establishment for income tax purposes as from the date of commencement. Mexico has entered into tax treaties with several countries, and the time periods vary for classifying a construction activity as a short-term construction activity or permanent establishment. In some cases short-term construction activities are no longer subject to Mexican withholding taxes under a particular treaty. Therefore, consultation with an international tax specialist is advisable prior to the execution of the contract or commencement of the work. Rental income Real estate rental income is considered Mexican-source income if the real estate is located in Mexico. Rental income for the use of personal property is considered Mexican source if the personal property is to be used in Mexico. Tax is assessed at the rate of 25% of the gross rental income without deductions of any kind, payable on a withholding-at- source basis: There are two other exceptions to this rule, as follows: • In the case of personal property, a 25% rate applies for the use of “commercial, industrial or scientific equipment” which under the law are classified as royalties. Railroad cars, containers and airplanes and ships that may be commercially exploited are subject to a 5% withholding tax rate. • Property leased under a financial lease, in which case a 15% tax is applied only on the portion of the lease payments that is deemed to represent interest. Sales of real estate The proceeds of sales of land and of buildings located in Mexico or of trust rights thereto are considered to be Mexican-source income. In general, tax is levied on a withholding basis at the rate of 25% of the gross income received, unless the foreign corporation elects to pay tax at the rate of 35% on the net gain realized, which will be determined on the same basis as for resident individuals (i.e., including an adjustment to cost for inflation, based on the number of years the asset was held), except that foreign corporations are not allowed to deduct any loss carryforwards of a similar nature incurred in prior years. In order to elect to be taxed on the net gain, the non-resident should have a representative duly qualified in Mexico, as discussed earlier, and the transaction should be carried out through a public deed, unless the assets are represented by non-amortizable real estate trust certificates. When the sale is made through a public deed and provides for installments payable in a period of more than 18

162 Tax and Legal Services - PwC Mexico months, the tax can be paid in the years the installments are actually collected or due under the contract in certain cases. When the purchaser is another non-resident and has no representative in Mexico, the seller is required to pay the tax directly.

Fees paid to foreign corporations When the related specific services are rendered outside Mexico by foreign corporations, any fees paid to them are not subject to Mexican income tax, unless the services are classified as technical assistance or publicity, which are taxed by applying the same rates applicable to royalties, regardless of where the services are rendered. On the other hand, any type of fees or commissions paid to tax haven or preferential tax regime entities are subject to withholding tax at a 40% rate, when the transactions are carried out between related parties.

Portfolio investments There is no difference in the taxation of income from subsidiaries, portfolio investments or unrelated parties. It should be noted, however, that investment income of foreign pension funds in existence and exempt under the laws of their respective countries is wholly exempt from Mexican income tax.

Taxes other than income tax As regards the value-added tax (VAT) described in Chapter 23, permanent establishments of foreign corporations in Mexico are subject to VAT on the same basis as resident business enterprises. Non-residents are required to pay VAT in respect of their activities in Mexico if such activities are subject to the tax, regardless of whether the related income is subject to income tax. Accordingly, VAT would be payable on sales of assets in Mexico other than exempt real estate (land or residential property) and shares or capital interests, whether or not they are taxed under the Income Tax Law. In such cases, the Mexican payer is obligated to withhold the corresponding VAT. 16 The rental of machinery, equipment and real estate from foreign corporations is generally VAT taxed, subject to the withholding mentioned above. In the case of services utilized in Mexico but for which payment is made to non-resident service providers, the Mexican resident making such payments is deemed to be the importer of such services and is required to reflect a VAT liability thereon at the time of making the monthly VAT returns, but may reflect a VAT credit in an equal amount against the liability for tax on the residents’ own taxable activities.

Regional administrative offices Mexican legislation does not favor the establishment of regional administrative offices. In addition, restrictions on the employment of foreigners may still make it difficult to staff such an office. Operations of this type may have to continue to be assigned to a Mexican subsidiary that also acts as regional headquarters.

Doing Business in Mexico 2015 163 164 Tax and Legal Services - PwC Mexico Chapter 17 Taxation of shareholders

Investor considerations • Dividends paid to individuals and residents abroad are subject to 10% withholding tax. Use of tax treaties to reduce this withholding tax rate should be considered on a case-by-case basis. • Dividend withholding does not apply to profits generated prior to 2014. Balances distinguishing pre 2014 and post 2013 CUFIN are needed to apply this benefit. • When dividends are distributed in excess of net after-tax distributable earnings, the company paying the dividend is subject to a corporate tax at an effective tax rate of 42.86% for 2014. • Intercompany dividends paid between Mexican corporations are not included in taxable income. • Dividends to domestic individual shareholders are taxable to these shareholders on a gross-ed up basis, although a proportional credit is available for their portion of the income tax incurred by the payer. • Capital gains on the sale of shares by domestic corporations are generally fully taxable. • Capital gains on the sale of shares issued by domestic corporations that are realized by individuals, whether Mexican nationals or foreigners, or by foreign corporations are taxable through a special procedure. • Disposal by individuals and non-resident owners of Mexican shares traded widely and publicly in the Mexican or certain 17 foreign stock exchanges is generally subject to a 10% tax rate. • A reorganization of Mexican corporations of the horizontal type, i.e., a consolidation of two corporations or a spin-off of a corporation into two or more corporations, can be done essentially tax-free fulfilling specific requirements, except for the special tax on acquisition of real property. For non-Mexican entities involved in a reorganization of ownership in Mexican entities, an authorization can be granted for deferral of taxes. • Tax basis of assets can generally be stepped up through acquisitions. • Net operating loss carryovers of the surviving corporation in a merger may be utilized only against profits earned in the same line of business. • Net operating losses of the merged company are permanently lost.

Doing Business in Mexico 2015 165 Domestic shareholders Dividends As from 2014, the applicable tax regime on dividends changed, and profits distributed from such year to individuals (or to foreign residents) are subject to a 10% tax. This tax should be withheld by the Mexican Corporation paying the dividends. In addition to such withholding tax, the tax treatment of dividends is as follows: Dividends paid by Mexican corporations are not deductible by the corporation distributing them or includable in the gross income of the domestic corporate recipient. No corporate taxes are applied if the dividends are distributed out of earnings on which the regular corporate tax has been paid (CUFIN balance, see Chapter 15) Dividends and other corporate distributions of earnings that for any reason have not been subject to the regular corporate tax are subject to tax at an effective rate of 42.86%. This is a tax on the distributing corporation, not a withholding or other tax on the shareholder. To enable a corporation to determine whether a dividend is distributed out of earnings that have already been subject to the corporate income tax, it must keep a record of such earnings in a special memorandum account called “after tax earnings” (free translation of “Cuenta de Utilidad Fiscal Neta”, or CUFIN). In general terms, these accounts would include each year’s previously taxed net earnings plus domestic dividend income received by the corporation, minus dividends distributed out of the applicable account. Each year, before adding the current year’s previously taxed net earnings, the balance in the CUFIN account at year-end will be adjusted for inflation. Due to the fact that the above-mentioned 10% dividend withholding tax only applies for profits obtained by the Mexican corporation as from 2014, Mexican entities are required to maintain a CUFIN balance with earnings generated up to 2013, and start an additional CUFIN account to record earnings generated as from 2014 (please note that when those two accounts are not handled separately, or when the aforementioned earnings are not identified, the earnings distributed are understood to be generated as from 2014). A detailed set of rules, illustrated in Appendix IV, establishes a procedure for computing the balance of a corporation’s previously taxed net income, taking into account the company’s taxable earnings since 1975. Appendix IV illustrates both the computation of each year’s additions to this account and the restatement for inflation to be made each year. Dividends or distributions of profits from foreign sources received by Mexican shareholders must be included as ordinary income, but a foreign tax credit may be claimed by the taxpayer (see also “Dividends and interest” in Chapter 18). In addition, dividends obtained by individuals are subject to an additional 10% tax paid on the gross amount of the dividend received from foreign sources. Dividends distributed to Mexican resident individuals are taxable to those individuals on a gross-up basis, allowing a domestic deemed-paid credit for income taxes paid at 30% by the Mexican corporation paying the dividends, which will effectively make the dividends taxable at an additional 5% regular income tax, since the maximum tax rate

166 Tax and Legal Services - PwC Mexico for individuals is now 35%. Therefore, the combined tax for Mexican resident individuals on dividends from foreign sources may be 45%, while the combined additional tax on domestic dividends may be 15%. Capital gains Gains on the sale of shares by corporations are fully taxable, although the historical-cost basis of the shares for this purpose is adjusted for inflation and, in the case of shares issued by Mexican corporations, the basis is also adjusted for the change in the after-tax earnings account (CUFIN), as discussed under “Capital gains” in Chapter 15. Capital gains on the sale of shares by individuals are taxable in the same manner as for corporations. If the gain arises from the sale of publicly and widely traded Mexican shares through the Mexican Stock Exchange (or certain foreign exchanges), a 10% withholding tax rate should be applicable.

Foreign shareholders Dividends Individuals and parties resident abroad are subject to 10% tax on dividends or earnings generated as from 2014 and distributed by a Mexican company. The tax must be withheld by the companies distributing the dividends, and it is considered to be a definitive tax payment. Please note that some treaties concluded by Mexico may grant a zero or lower withholding tax rate. As in the case of domestic shareholders, an additional corporate tax at an effective rate of 42.86% applies only if the dividend is distributed out of earnings that have not been subject to the regular corporate income tax. Capital gains Gains by foreign corporations on the sale of shares issued by Mexican corporations are taxable, irrespective of where the sale takes place, as described under “Sales of shares or capital interests” in Chapter 16. As in the case of resident individuals, gains by foreign shareholders, corporate or individual, are subject to a 10% tax if they arise from the sale of publicly and widely traded shares through the stock exchange. 17

Reorganizations Incorporation The conversion of a Mexican branch of a foreign corporation into a subsidiary corporation would entail the following: • Formation of the subsidiary. • Transfer (generally through a sale) of all of the branch assets to the subsidiary. • Transfer of its employees, who would retain their seniority and, • Liquidation of the branch. The transfer of the assets and the liquidation of the branch are taxable transactions that may give rise to taxable income or loss, value-added tax and real estate transfer taxes. A specific authorization (or notification in some cases) may be required to permit the incorporation of the branch of the foreign corporation, but if it is required, in all probability this authorization would be granted by the National Commission on Foreign Investment because operating as a branch already involves 100% foreign ownership. Net operating losses of the branch, if any, would be lost, as they are non-transferable.

Doing Business in Mexico 2015 167 Merger or amalgamation Two different types of tax-free mergers are generally recognized in Mexico, provided all applicable requirements are met: (1) a vertical merger, where one company has already acquired the shares of the other company; and (2) a horizontal merger or amalgamation, where two or more companies are merged, with the assets and liabilities of one company exchanged for new shares of the surviving company. In accordance with the income tax law the depreciable value for tax purposes of the fixed assets taken over may not exceed their net undepreciated value for tax purposes to the merged entity. Any accounting profit to the surviving company arising from the merger would not represent taxable income, assuming all requirements are met. Properly structured mergers are tax free for federal taxes, except for the local tax on acquisition of real property, which is payable even in the case of mergers or other tax-free reorganizations. In these situations there are no taxable profits to the shareholders of the merged company, and no gain, loss or goodwill arises from the merger. In order for mergers to avoid sale treatment for tax purposes, a one-year continuity-of-business requirement is imposed on the merged entities, among other requirements. If a merger occurs within five years of a prior merger, authorization for / notification must first be obtained from the tax authorities. The cost basis of the shares acquired as a result of the merger is equal to the basis that the shareholder had for the shares of the merged corporation that are canceled. Split-up or spin-off In the case of the formation of one or more additional corporations where assets and activities of a corporation are transferred to the new entities, but where the transferor corporation may continue to exist and there is no change in the capital invested or in the original shareholders and their proportionate ownership (a corporate split-up or spin-off), the following rules apply: • Assets transferred will retain their original attributes, such as original cost, remaining basis and date of acquisition, without gain or loss being recognized. • The adjusted-cost basis of the shares of the company that is split up is apportioned among the original shares and those issued as a result of the split-up. • The transaction is free of income tax if certain requirements are met. If a split-up is recharacterized as a capital reduction under the Income Tax Law, it will always be subject to sale treatment for tax purposes. • Net operating loss carryovers may be similarly apportioned. • After tax earnings and the adjusted paid-in capital accounts are also apportioned between the surviving entities A corporate split-up will be treated as a tax-free reorganization, provided 51% of the shares with voting rights is maintained for three years, beginning one year prior to the split-up. The holders of the 51% must maintain the same proportionate holding in the capital of the resulting entities as they had in the original entity prior to the split-up. Any transfer of real property will be subject to the local tax on acquisition of real property. The related entities in a merger or split-up are required to fulfill specific fillings and formal requirements.

168 Tax and Legal Services - PwC Mexico With the exception of mergers as discussed above and corporate split-ups, no special tax rules exist for other types of reorganizations. Each would be taxed on the basis of what actually takes place if any measurable net income in cash, credit or kind arises. A reduction in capital stock may also be taxed, depending on the circumstances. Liquidations Consequences to shareholders Liquidating distributions in excess of amounts of paid-in capital of a corporation (indexed for inflation) or paid for the acquisitions of its shares (also indexed for inflation) are treated as dividends.

Consequences to corporations When a corporation is placed in liquidation it must (1) file an income tax return for the period from the end of its last taxable year to the date of liquidation and (2) file income tax returns covering the liquidation of its assets, paying the corporate income tax on the total net taxable income arising during the period of liquidation. These income tax returns must be filed and the related tax paid every six months during the liquidation period, each return being considered an advance payment of the tax due with the final return. Distributions in kind would generally be treated as a taxable sale at market value, with any appreciation over the tax basis of the assets distributed representing income for tax purposes of the corporation being liquidated. Acquisitions Asset acquisition A non-resident is allowed to own assets including shares of Mexican corporations in Mexico, subject to certain restrictions specified in the Foreign Investment Law (see Chapter 5). In addition, antitrust laws should be reviewed and permission may be required for this purpose.

Buyer and seller 17 There are no general or special rules that may be applied in trying to offset advantages of buyers and sellers from different ways of handling an acquisition. However, buyers should be aware that there is rarely an advantage in adopting a procedure that will result in a stepped-up basis for fixed assets, because this usually requires a sale of the assets by the seller (a Mexican corporation), subject to employee profit sharing obligations, value added tax and possibly even corporate income tax. In calculating taxable gain, the cost of land and buildings (net value) is adjusted for inflation on the basis of the number of years the assets were held before the sale. The acquisition value of the building would be depreciable to the buyer at 5% a year (excluding land, which is a non-depreciable item). Also, in the acquisitions of shares, the tax basis of the assets and other attributes of the Mexican entity remain the same for depreciation, amortization and other purposes. In this case, buyers should be aware that tax and other legal and formal obligations (and contingent liabilities) remain with the entity whose shares are acquired. Therefore, due diligence is indispensable prior to acquisitions of either shares or assets.

Doing Business in Mexico 2015 169 170 Tax and Legal Services - PwC Mexico Chapter 18 Taxation of foreign operations

Investor considerations • Foreign-source income of Mexican corporations is fully taxable, with limited double taxation relief by way of a foreign tax credit. • Mexico has entered into tax treaties and has signed agreements to exchange tax information with several countries, and these treaties also include provisions to minimize the effects of double taxation. • Earnings of a foreign subsidiary of a Mexican corporation are taxable only when repatriated as dividends, with the exception of companies with investments in entities located in a low-tax jurisdiction or preferred tax regime (PTR) (i.e., tax havens specially mentioned in the law as well as entities subject to a tax rate which is less than 75% of the tax that would be paid had the income been earned in Mexico) the income from which, the Mexican investor must generally consider as earned and taxable, although certain particular rules may apply. • In some cases the Mexican corporate shareholder owning at least 10% of the shares of the distributing corporation are entitled to a deemed paid credit for taxes paid by the foreign corporation. • Proceeds from the liquidation of a foreign subsidiary are taxable if they exceed their cost basis. • Dividends received by an individual are subject to an additional 10% tax which should be paid as a definitive payment. • Losses of a foreign branch can be offset against domestic profits, as the taxable income or loss of the foreign branch is included with the domestic operations on a current basis. 18 • Consolidation of foreign subsidiaries is not allowed.

Doing Business in Mexico 2015 171 Taxation of foreign income Mexican corporations are taxed on their income from all sources. Foreign-source income usually qualifies for the foreign tax credit described in this chapter. Branch income The net income or loss from operations of a foreign branch of a Mexican corporation is includable in the annual income tax return of the Mexican corporation and subject to the same income tax rates, with right to the foreign tax credit discussed below. Foreign subsidiary income The income of foreign subsidiaries of Mexican corporations is not taxed until dividends are paid to the latter, with the exception of investments in preferred tax regimes as described below.

Consolidation for tax purposes The inclusion of foreign subsidiaries in a consolidation for Mexican tax purposes is not allowed. Capital gains and liquidation proceeds Gains on sales of shares or on the liquidation of a foreign subsidiary are taxed as ordinary income to a Mexican resident. Loss carry forwards on sales of shares can generally be used to offset gains from similar transactions. Dividends and interest Dividends or distributions of profits received by Mexican companies as shareholders or partners of foreign enterprises and interest from a foreign subsidiary must be included as ordinary income, subject to the foreign tax credit indicated below. Dividends or distributions of profits received by an individual are subject to an additional 10% tax, which should be paid as a definitive payment. Royalties and technical assistance fees Income from technical assistance fees and royalties charged to non-Mexican companies represents ordinary income for income tax purposes, with foreign tax credit allowed, but it is subject to favorable treatment for value-added tax purposes. Foreign exchange gains and losses Foreign exchange gains and losses resulting from certain assets or liabilities denominated in foreign currency are treated as additional interest income or interest expense, respectively, as discussed under “Business profits” in Chapter 15. Exchange gains and losses are recognized on an accrual basis at the end of each month.

172 Tax and Legal Services - PwC Mexico Translation of branch profits Foreign branches of Mexican corporations must keep full accounting records and recognize income or losses for tax purposes on a current basis. In most cases transactions may be translated into pesos when effected (i.e., at that day’s exchange rate) or, at the election of the taxpayer, at the exchange rate at the end of each month.

Translation of subsidiary earnings Since the earnings of a foreign subsidiary are taxable only as and when formal dividends are remitted, its earnings need not be translated on a current basis. Dividend income is translated at the exchange rate of the day on which it is paid to the shareholder. Different rules apply to PTR investments (the Mexican CFC equivalent).

Double taxation relief Foreign tax credit The income tax law allows Mexican corporations and individuals a foreign tax credit on income from foreign sources. The law provides that taxpayers may credit against their Mexican income tax liability the amount of income tax paid in foreign countries on their foreign-source income, as long as such income is subject to income tax in Mexico. In general, credit is available in respect of foreign income taxes directly withheld from foreign-source income or paid with a tax return filed in the foreign country in the name of the Mexican resident or by a foreign branch of a Mexican corporation. However, in the case of dividends or distributions of profits received from corporations resident in a foreign country, when a Mexican corporation owns at least 10% of the capital of the foreign corporation for six months prior to the dividend, a deemed-paid credit can also be taken for the proportionate part of the underlying foreign corporate income tax paid by that corporation, corresponding to the dividend or distribution of profits received. In this regard, the Mexican law provides several formulas to determine the applicable foreign tax credit and its limitations. In calculating the amount of income subject to Mexican tax in these cases, the dividend or distribution must be grossed up to include the proportionate amount of tax paid by the foreign corporation, as illustrated in Table XII. This credit is allowed also on tax paid on a second holding tier, when certain conditions are met. 18 Foreign tax credit limitation The foreign tax credit will be allowed up to the effective Mexican rate of tax on the taxable income (tax result) shown by the annual return, as reflected in Table XII under an “overall” type limitation. Taxpayers who are not in a position to take full credit for the taxes paid to a foreign country on foreign-source income are allowed a ten-year carryforward of such excess foreign taxes, provided certain compliance requirements are met and the credit is limited to the corporate tax rate of 30%. In addition, foreign tax credit should be computed on a country by country basis. And it should be determined for each taxable year in which dividends arise. In addition, specific registries should be recorded and source documentation regarding such registry.

Doing Business in Mexico 2015 173 XII-Foreign Tax Credit on Dividends

The proportional amount of (direct) income tax paid abroad by a resident company via dividends is obtained by applying the following formula:

Where: MPI: Proportional amount of income tax paid abroad by the foreign resident that distributes dividends or profits directly to the Mexican corporation. D: Dividend distributed by the foreign resident company to the Mexican entity without reducing the withholding or income tax paid from said distribution. U: Profit that was the basis for distributing the dividends, after payment of income tax by the foreign resident. IC: Income tax paid abroad by the foreign resident that distributed dividends to the Mexican company.

The proportional amount of indirect income tax paid (at a second tier) is determined with the following formula:

Where: MPI2: Proportional amount of income tax paid abroad by the foreign resident at a second tier, which distributes dividends to another foreign company (first tier), which in turn distributes dividends to a Mexican corporation. D: Dividend distributed by the foreign resident without reducing the withholding or income tax. U: Profit that was the basis for distributing the dividends after income tax (at the first tier). D2: Dividend distributed by a resident abroad to another foreign resident that in turn distributes dividends to the Mexican company without reducing the withholding or income tax. U2: Profit served as the basis to distribute dividends after payment of income tax (at second tier), obtained by the foreign resident which pays dividends to another foreign resident and finally distributes dividends to the Mexican company. IC2: Income tax paid abroad by the foreign resident that distributed the dividends to another foreign resident which in turns distributes a dividend to the Mexican corporation.

Lastly, there is a third formula that must be followed to determine the limitation of the combined taxes paid abroad:

Where: LA: Limit of foreign tax credit that can be credited by the corporate Mexican entity from the first and second corporate level. D: Dividend distributed by the foreign resident to a Mexican resident without reducing the withholding and income tax from a distribution. MPI: Proportional amount of corporate income tax paid abroad related to the first tier dividend. MPI2: Proportional amount of corporate income tax paid abroad related to the second tier. T: Corporate tax rate in Mexico. ID: Credit related to the corporate tax paid abroad (first and second level) as well as from withholding made by a foreign resident.

174 Tax and Legal Services - PwC Mexico Chapter 19 Partnerships and joint ventures

Investor considerations • Commercial partnerships, as well as professional partnerships organized under civil law, are taxed as corporate entities. Partners in a commercial partnership are taxed in the same manner as shareholders. • Periodic distributions of professional partnerships are treated as salaries. • A joint venture was previously a conduit and not a separate taxpayer. Currently these are treated as a separate taxpayer under similar rules as corporations. Each venturer is taxed in the same manner as a shareholder of a corporation.

Partnerships Entity or conduit Partnerships are taxed in the same manner as corporations, as described in Chapter 15. The partners, whether individuals, corporations or other entities, either domestic or resident abroad, are subject to dividend tax on distributions of after-tax profits and dividend withholding tax. In addition, as discussed in Chapter 17, the paying entity is required to pay tax on a grossed-up basis on the distributions that exceed the balance of the entity’s after-tax earnings account (CUFIN). Professional partnerships organized under civil law (Sociedad Civil, shown as “S.C.” at the end of the legal name of the Mexican entity) are also generally taxed in the same manner as corporate entities, and the individual partners are taxed as recipients of salary income with respect to income distributed currently 19 (which is treated as a deductible salary expense by the partnership) and in the same manner as dividends are taxed to regular shareholders with respect to actual distributions of retained earnings to the partners. The Sociedad en Nombre Colectivo (often termed “SNC”), is a general partnership and is treated the same as a regular corporation for Mexican income tax purposes. In addition, the Sociedad en Comandita, (often termed “S en C”) is a limited partnership and is treated the same as a regular corporation for Mexican income tax purposes.

Doing Business in Mexico 2015 175 The Sociedad de Responsabilidad Limitada (often termed “S de RL” ) is similar to limited liability companies in foreign countries and has the same tax treatment as corporations in Mexico. There is no conduit entity in Mexico although certain trusts conducting business activities are considered flow-through entities for Mexican tax purposes. (See Chapter 21).

Joint ventures Entity or conduit An unincorporated joint venture or Asociación en Participación (A. en P.), described in Chapter 9 under “Joint venture contract,” was previously a conduit and not a separate taxpayer. A. en P. are now subject to the same tax treatment as regular companies when the A. en P. is used to carry out business activity in Mexico. In this case, the active partner does not combine the taxable income or loss of the A. en P. with its other taxable income or losses even though it is conducted as a division of the legal entity acting as the managing active partner (asociante). The Federal Fiscal Code defines the A. en P. as group of persons or entities that carry out business activity pursuant to a contract so long as the persons participate in the profit and loss of the business in accordance with a legal provision or the contract itself. In accordance with the general provisions of the income tax law, the managing active partner (asociante) of an A. en P. joint venture contract is required to pay the taxes arising from the A. en P., including estimated payments of income tax, and to comply with all of the tax requirements pertaining to the activities carried out by the A. en P., which is now treated as a separate taxpayer in most situations. Profit distributions are subject to the treatment applicable to dividends, and when the A. en P. agreement is cancelled or terminated, the capital reduction rules apply. Goods contributed by the active and passive partners are considered to be sold to the joint venture at a value equivalent to the inflation –adjusted net tax basis of the investment. Depreciation may only be claimed by the A. en P. after assets have been contributed to the joint venture. The passive partners of an A. en P. are jointly liable for taxes pertaining to the activities carried out by the active partner through the A. en P. to the extent of any assessment not covered by the assets of the joint venture and for the amount of the contribution of the passive partners to the joint venture.

176 Tax and Legal Services - PwC Mexico Chapter 20 Taxation of individuals

Tax planning for expatriates • There are no special tax concessions available for foreign nationals other than those established in tax treaties that Mexico has entered into. • Residents are taxed on worldwide income; non-residents are taxed only on Mexican-source income. • Residents are subject to a tax table of progressive rates. Non- resident employees are subject to tax at graduated rates that are significantly different from the resident tax rates. • Salaries paid by a non-resident employer who does not have a permanent establishment in Mexico to a non-resident employee rendering services temporarily in Mexico are exempt if the non-resident employee is physically present in Mexico for less than 183 days, consecutive or not, in any 12-month period. • Timing of arrival and departure could result in significant savings. • Joint returns are not allowed. Investment income of a non- working spouse is not includable in the other spouse’s return, except under specific circumstances. • Planning the timing of major transactions, such as the exercise of employee stock options or the liquidation of an investment, before establishing residence in Mexico, is essential. • Moving expense reimbursements for specific out-of-pocket normal moving expenses are not taxable. Deferred compensation paid from abroad after departure is not taxable if related amounts are not cross charged or billed to the local affiliate or allocable to a Mexican permanent establishment of the foreign employer, unless paid within 6 months of departure. A large network of tax treaties has been entered into with several countries. (See Appendix VI). 20

Doing Business in Mexico 2015 177 Territoriality and residence Residents of Mexico Resident individuals are subject to Mexican tax on their worldwide income, regardless of their nationality. The tax applies at graduated rates ranging from 1.92% to 35% for 2014. Residents are granted a foreign tax credit with respect to their foreign-source income. Non-residents, including Mexican citizens residing abroad, are usually taxed only on their Mexican-source income, as discussed below. Mexican nationals are assumed to be residents for tax purposes, subject, however, to proof to the contrary, such as acquiring residency for tax purposes in another country. The Federal Tax Code provides that a person is a resident of Mexico when he establishes a home in Mexico. If the individual has a home in another country, then the individual is a resident in the country where he has his center of vital interests. A person is considered to have his center of vital interests in Mexico if either: 1. More than 50% of his income comes from Mexican sources in the calendar year, or; 2. Mexico is the primary place of his professional activities. For this purpose, salary income would be considered Mexican source to the extent the services are rendered in Mexico, no matter who pays the salary. The definition of home as used in the Federal Tax Code is not entirely clear, but it is generally believed to be an abode that it is permanently available to the individual A number of factors should also be considered, such as the type of living quarters occupied in Mexico, i.e., on site facilities provided by employers, transient quarters, etc Nonresidents of Mexico Foreigners working in Mexico on short-term visits are usually not considered residents of Mexico for tax purposes. Other non-immigrants entering the country for longer periods of time would remain as non-residents unless they establish a home in Mexico. Non-resident individuals are not subject to Mexican taxation when paid from abroad by a non-resident employer that does not have a permanent establishment in Mexico, as long as they are present in Mexico for less than 183 days in any 12-month period. If their stay exceeds 183 days, they will be required to pay Mexican tax on their monthly salaries from the beginning of their stay. In the event that the non-resident has to pay taxes in Mexico, the tax would be determined in accordance the graduated rate table shown in Appendix V. The table includes an exempt amount, and the balance is taxable at 15% or 30%, depending on the cumulative income level during a 12-month period. The tax paid is considered final; therefore, non-residents do not file an annual tax return.

178 Tax and Legal Services - PwC Mexico Change of residence In accordance with the income tax law, individuals who become resident after having been taxed as non-residents during part of the year will consider the non-resident taxes paid as final. Such individuals are subject to Mexican income tax as residents on their income for the part of the calendar year, starting with the date they acquire residency in Mexico to the end of the calendar year, and also they would be required to file a part- year resident annual income tax return. Residents of Mexico who move to another country during a calendar year should consider tax withholdings and/or advance payments of income tax already made as final and may not file an annual income tax return. Also, taxpayers are required to file a notice of suspension of activities due to the termination of their Mexican tax residency, during the previous 15 days before the change of tax residency takes place. Mexican nationals who move to a tax preferred jurisdiction (a “tax haven”) are considered to continue to be tax residents of Mexico for the following 3 years after filing the notice of change of tax residency. Source rules The types of income considered as Mexican-source income are specifically defined in the section of the law dealing with non-residents, as discussed in Chapter 16. Income from dependent personal services is generally considered to be Mexican-source income in proportion to the services rendered in Mexico. The tax is levied at graduated rates, as described for salary income for non-residents in Appendix V. Fees paid by a Mexican resident company to members of its board of directors or vigilance or advisory committees and to administrators and statutory auditors (comisarios) are treated as similar to salaries by the income tax law and are considered to be Mexican- source income, regardless of where the services are rendered and whether payment is made within or outside Mexico. In this case tax is imposed at a flat 25% t of the gross fees earned, instead of at the normal graduated rates specified for other salaries. Gross income Definition of taxable income The law provides that individuals are taxed on income received in cash, kind or credit and, in certain cases, in services. However, the law includes a number of exceptions to the general rule as regards to income in credit (i.e., earned but not paid). These exceptions provide that the following types of income become taxable only when 20 received in cash or in kind. • Income from personal services. • Rental income. • Others.

Doing Business in Mexico 2015 179 Some exempt income received by resident individuals must be reported in the annual income tax return (i.e. loans, gifts or prizes exceeding Ps 600,000; business expense reimbursements exceeding Ps 500,000, etc.).The report is for disclosure purposes only, and the items remain non-taxable. However, failure to disclose an item in the annual tax return when required could cause it to be taxable. Employee service income Income from personal services (earned income) includes salaries, commissions, bonuses, and allowances of all types, including those for housing, living expenses, education, foreign service, tax reimbursements, and the participation of employees in the profits of their employer. A company car provided to an employee is not taxable to a private sector employee. However, the employer’s deduction will be subject to certain requirements that restrict deductibility. (See related comment under “Depreciation” in Chapter 15). Business expenses reimbursed to employees may be considered taxable income to the individual unless they are properly supported. Regarding business travel expenses, they are non-taxable to the employee if supported by receipts from third parties and certain other requirements are met. A per diem rate paid without filing an expense report with the employer would be treated as a taxable allowance, unless an expense report is properly filed, supported by third-party documentation evidencing the disbursement for the travel, meals and lodging expenses. Directors and statutory auditors (comisarios) are subject to tax on their fees which are treated as income similar to wages. Severance compensation is taxed under special rules, as described below. Tax-exempt income from employee services Certain fringe benefits, such as employee’s social security contributions portion paid by the employer or contributions to the employee’s savings fund, are tax-exempt to the employee if certain requirements are met. Resident taxpayers may exempt up to 30 days of the corresponding minimum wage for Christmas bonus, also an exemption equal to a maximum of 15 days of the corresponding minimum wage is applicable for vacation premium pay and the mandatory employer profit-sharing. Other items such as compensation for disability, unemployment and old age; death benefits; and social welfare benefits, including qualified savings funds, social security benefits and pensions are tax-exempt subject to some limitations. A limit is imposed on the tax exemption of certain social welfare benefits granted by the employer in the form of educational scholarships, day-care centers, cultural activities, sports, grocery coupons and other benefits of a similar nature, as follows: • Whenever the sum of both the salaries and social welfare benefits exceeds an amount equivalent to seven times the annual minimum wage that corresponds to the geographical area of the taxpayer; the exemption is limited to the amount equivalent to one annual minimum wage and any excess would be subject to income tax withholding. This limitation is applicable only to the specific types of benefits mentioned above and does not apply to other types of benefits, such as contributions made by an employer to an employee’s savings fund or pension or reimbursements for medical expenses.

180 Tax and Legal Services - PwC Mexico • Under no circumstances the social welfare benefits will be taxable if their amount, together with other regular compensation, does not exceed seven times the annual minimum wage that corresponds to the geographical area of the taxpayer. Seniority premiums, retirement payments, indemnities, and other similar one-time severance payments are tax-exempt up to 90 times the minimum wage per year of service, and tax is payable only on any excess following a specific procedure. Starting 2014 employer deductions related to contributions to pension and retirement funds as well as exempt salaries paid to employees are reduced from 100% to 53% and 47%, depending on specific compensation changes made by the employer during the previous year. Professional fees and business activities Independent professionals and individuals carrying out business activities through unincorporated enterprises and other individuals rendering personal services (i.e., independent contractors) may deduct their normal expenses following rules similar to those for business enterprises, as described in Chapter 15. If the total deduction amount exceeds the income declared in the tax year resulting in a loss, it may be carried forward during the following 10 years and deducted against the same type of income. Capital gains Capital gains on sales or exchanges of assets, including those realized on all types of personal and real property are generally taxable.

Exempt gains Income from the following sources, among others, is exempt from income tax: • Transfers of property related to corporate merger. • Sales of other types of personal property (other than shares of stock) when the total gain on such sale in a calendar year does not exceed three times the annual minimum wage (the excess is taxable). • Sale of the taxpayer’s residence once every 5 years, limited to 700,000 UDIS of transfer value (Investment Units). • Transfers of property related to inheritances. • Gifts between spouses and between direct ascendants / descendants

Determination of taxable gain When determining the taxable gain, the costs and expenses of the transaction are 20 deductible. In the case of shares, the average cost of shares or other securities or of capital accounts in non-stock companies can be adjusted by factors intended to recognize the effects of inflation over the period of years in which the shares were held. The cost basis of shares in a Mexican corporation is further adjusted by the fluctuation in the after-tax earnings account (CUFIN) and the additional reinvested tax profit account (Reinvested CUFIN) during the holding period of the shares. Therefore, the seller should add increases or subtract decreases in the CUFIN balance during the holding period in order to determine the cost basis of the shares sold. The CUFIN and the Reinvested CUFIN are calculated following the procedure described in Chapter 15.

Doing Business in Mexico 2015 181 Calculation of tax A portion of the taxable capital gain from the sale of shares, real estate and other assets is added to other ordinary taxable income in the annual personal income tax return. The remaining portion of the taxable gain is subject to tax at a flat rate which is the resulting effective rate of tax payable by the individual on the total income reported in the annual tax return. The individual also has the option to apply a flat rate based on the average effective tax rate from the preceding last 5 years. The portion of taxable income to be added to the other ordinary taxable income in the annual personal income tax return is determined by dividing the total capital gain between the number of complete years that the stock was held, up to a maximum of 20 years. For example, in the case of an asset held for more than 20 years, only 5% of the taxable gain must be added to ordinary income and the flat rate will apply to the remaining 95%. Losses on sales of real estate and shares are partially deductible. The immediate deductible portion of the loss is determined on the basis of the number of years the asset was held (not to exceed ten). This portion may be deducted from other types of investment income (except salaries, professional fees and business activities) declared in the current annual tax return or from capital gains for the following three calendar years. The remaining portion of the loss which may not be deducted in the current annual tax return originates a tax credit which may be applied against other capital gains tax in the same year or in the following three years.

Gains on the sale of shares through stock exchange Individual residents in Mexico and abroad are subject to tax on the gain related to sales of the shares of Mexican and foreign business entities, certificates of deposit for those shares and capital derivative financial operations (DFO’s) referred to shares and share indexes carried out through stock exchange or Mexican derivatives markets, equivalent to 10% of the gain. Tax resident individuals must determine the tax payable for the period in a tax return to be filed along with the annual income tax return. The annual tax on gain, including gains generated at foreign stock exchanges or markets related to shares of Mexican corporations, is definitive. Losses resulting from the sale of shares and DFO’s on a stock exchange or derivatives market may be applied to the actual tax year gains or the following 10 years. In case of non-resident individuals for Mexican tax purposes, the intermediary must withhold the corresponding tax on the resulting gain for each transaction, without deducting any loss. No tax should be withheld by the intermediary if the non-resident individual provides a statement specifying that he is a tax resident of a country which has a tax treaty with Mexico. In order to determine the gain or loss on the sale of shares, the acquisition cost, plus any commissions paid, restated for inflation can be deducted. In case the shares were purchased prior to 2014, there is an option to determine the cost which would be the average of the 22 most recent closing prices of the shares, unless such shares are unusual due to the value, number or volume of operations regarding the previous 6 months. In these cases, the average for the preceding six months may be used.

182 Tax and Legal Services - PwC Mexico Rental income Resident individuals are taxed on income from the rental of real property. They are allowed a standard deduction equal to 35% of their gross rental income plus property taxes, in lieu of actual expenses and depreciation. Alternatively, they may elect to deduct actual expenses incurred on the property rented, including depreciation at 5% on the building cost (indexed for inflation), fees and commissions (up to 10% of gross rental income), property taxes, insurance, maintenance and interest on loans (net of inflation adjustments) for the purchase or construction of the property rented. Interest income Special treatment is applicable to interest received on fixed-income securities, such as bonds and others that are considered placed with the general investing public (as determined by the Mexican Tax Authorities), and interest received from Mexican banks or auxiliary credit institutions on acceptances, certificates of deposit, loans, and other credits. In general, financial institutions must withhold income tax at the statutory rate published by the Mexican Congress applicable for such year. This inflation adjusted interest is required to be included in the individual’s annual tax return, except when the taxpayer’s only taxable income is interest that does not exceed $100,000 MXP in the calendar year. Interest paid by credit institutions may be exempted as long as the average daily balance of the account does not exceed 5 times the annual minimum wage that corresponds to Mexico City. Income derived from premiums, bonuses or gains on the sale of bonds, securities or similar credit instruments that are classified as traded among the general investing public are also considered as interest subject to the same rate of tax on interest mentioned above (withheld by the brokers), rather than as a capital gain from the sale of securities. See the section for Other Income regarding the taxation of foreign currency exchange gains. Dividends Dividends received from Mexican corporations must be included in the gross income of individual shareholders, grossed up for the income tax paid by the corporation and reported in their individual annual tax return. It is possible to 20 claim the underlying corporate income tax paid as a credit against the ultimate tax liability of the individual. This system allows individual taxpayers to compute their tax on dividends at their own personal tax rate, which may be higher than the 30% credit for corporate taxes paid. There is a new 10% tax on dividends received from Mexican corporations. The tax must be withheld by the Mexican corporation, and it is a final tax. This new tax must be paid in addition to the (up 35%) tax to be paid with the annual tax return (net of the deemed credit for the Mexican corporation’s own income tax paid).

Doing Business in Mexico 2015 183 Dividends received from foreign corporations are fully taxable. If the dividend is also taxed in the foreign country, a foreign tax credit may be claimed by the individual shareholder, limited to the tax rate as per the applicable tax treaty, if any. The new 10% dividend tax is also applicable on dividends received from foreign corporations. The tax is self-assessed and must be paid each month in which foreign dividends are received. This new tax must be paid in addition to the (up to 35%) tax to be paid with the annual tax return. Foreign tax credits are not allowed against the new tax on foreign dividends. (See the discussion of tax treatment of dividends in Chapter 17). Income from the acquisition of assets There is a special income classification called “income from the acquisition of assets.” This type of income is generally taxable and includes acquisition by gifts (except certain exempt gifts, as mentioned below), treasure finding, prescription, permanent improvements made by the lessee to the rental property which will result in a benefit to the landlord once the contract expires, and by purchase when the appraised value of the asset exceeds by more than 10% the price paid. The amount of this type of income will be based on the appraisal value (or market quotation), as determined by individuals authorized by the Tax Authorities. In connection with these acquisitions, local and federal taxes (except income tax), appraisal expenses, notary fees, and the cost of litigation to establish rights to assets and commissions / fees paid may be considered deductible expenses by individual taxpayers. Acquisitions considered to be tax exempt include inheritances (even from an unrelated individual). Gifts between spouses and between direct ascendants / descendants are also exempt, regardless of the amounts. The annual exemption for gifts from other individuals (including gifts between siblings) is limited to three times the annual minimum wage of the taxpayer’s geographical area. Any gifts in excess of this amount will be considered taxable income to the recipient. Income derived from prizes such as lottery winnings is subject to a special tax regime. There are no separate tax regimes applicable to gifts and inheritances. Other income Gains on government concessions or royalties related to such concessions, exchange rate gains, and earnings from foreign investments, authorship royalties when not exempt and others. In general, any type of income from capital investments or operations not taxed under other sections of the law or specifically exempt would also be taxable. Included in the category of other income is interest (other than from certain Mexican bank deposits and fixed income securities), which is subject to a reduction for inflation indexing. Foreign currency exchange gains are also taxed as interest on the accrual basis. Therefore, foreign currency exchange rate fluctuations in relation to the amount of the principal held in foreign currency may result in a “virtual” gain, which is taxable in the annual tax return, even if there was no actual currency exchanged to/from Mexican Pesos. After 2010, the income from this interest will not be reported in the annual tax return but will be subject to definitive monthly tax payments.

184 Tax and Legal Services - PwC Mexico Non-residents As mentioned under “Territoriality and residence” above, non-residents, including Mexican citizens, are subject to tax only on Mexican-source income, as defined for each type of income in the chapter of the law regarding to the taxation of non-residents. Similarly, the provisions of tax treaties should always be considered, as these may override the provisions stated in the Mexican income tax law. Salaries Non-residents employee’s wages, salaries and other remuneration received for dependent personal services rendered in Mexico, are taxed on a graduated scale that exempts the first Ps125,900 any income in excess of that amount but not exceeding Ps1,000,000 is subject to tax at 15%; all income in excess of Ps1,000,000 is subject to a 30% tax rate. The tax is determined considering the accumulated income during the 12 month period, not necessarily a calendar year. Income from dependent personal services is exempt if the remuneration is paid by a non-resident employer that does not have a permanent establishment in Mexico and if the services are rendered within a period in which the employee has been in Mexico for less than 183 days in any 12 month floating period.

Exempt personal service income for diplomats and similar officials Remuneration of the following non-residents is also exempt, generally when there is reciprocity in the treatment of Mexican nationals in such countries: • Diplomatic agents. • Consular agents. • Employees of embassies or consulates of foreign nations who are nationals of such countries. • Members of official delegations representing foreign countries. • Members of humanitarian and scientific delegations. • Representatives, officers and employees of international organizations headquartered or with offices in Mexico, as established by the related treaties. • Foreign technicians hired by the federal government, as established in agreements between Mexico and their respective countries.

Independent personal services The source rules regarding independent personal services are the same as for salaries, in the sense that services rendered in Mexico are considered Mexican source income. It is deemed that a service is fully rendered in Mexico when part of such service is rendered 20 in the country, unless it may be proven that part of the service was rendered outside Mexico, in such case only the portion of the service provided in Mexico would be subject to tax. When the service is paid by a resident individual or entity the withholding tax, which is final, is 25% on the gross fees paid without any deduction. Income from independent personal services is exempt if the amount is paid by a non-resident entity or individual that does not have a permanent establishment in Mexico as long as the individual providing the service is physically present in Mexico for less than 183 days (consecutive or not) in any 12 month floating period.

Dividends Dividends distributed by Mexican entities are subject to a 10% tax withholding on the gross amount distributed.

Doing Business in Mexico 2015 185 Other income Other types of Mexican-source income, such as interest, rental income, capital gains, and royalties, are subject to tax, generally on a withholding basis, the same way foreign corporations do, as explained in Chapter 16. However, it should be kept in mind that, as mentioned at the beginning of this chapter, the provisions of the multiple tax treaties executed by Mexico should be analyzed, as these may provide a more favorable tax treatment.

Deductions Business-related deductions Salaried employees are not allowed personal deductions of any sort for expenses that might be incurred in connection with their employment. Expenses directly related to the production of other taxable income, such as expenses of a professional practitioner or of an unincorporated business enterprise, expenses on rental property and the cost related to the sale of real estate property and shares are deductible when determining the taxable income, as discussed earlier in this chapter. Personal deductions and allowances Resident taxpayers may claim the following personal deductions when supported by the corresponding electronic invoices: • Medical expenses disbursed in Mexico, for the portion which has not been reimbursed by a medical insurance. These include medical, dental and hospital bills for the taxpayer, spouse or common-law spouse, descendants, parents, or grandparents, as long as the annual income earned by the family member does not exceeds one annual minimum wage. Medical insurance premiums are also deductible. Medicines are not deductible, unless included in a hospital bill. • Funeral expenses up to an amount not exceeding one annual minimum wage, applicable to the family members indicated above. • Charitable contributions to tax exempt organizations that are authorized to receive donations. • The paid mortgage inflation adjusted interest, related to the purchase or improvement of the taxpayer personal residence, subject to certain limits. • Complementary contributions to social security retirement fund (AFORE) or Mexican personal retirement account. This deduction is capped at 10% of individual’s taxable income and the contributions must not exceed five times the annual minimum wage of the taxpayer’s geographical area. • School transportation for economic dependents, when it is mandatory by the institution. • Also based on a presidential decree, the school tuition paid may also be deducted in the annual tax return, subject to certain limits. The total personal deductions amounts for the year is limited, therefore it may not exceed the lesser of the following: • Amount equivalent to 4 times the annual minimum wage that corresponds to the geographical area of the taxpayer • Amount equivalent to 10% of the taxpayer´s gross income, including exempt income. The Contributions to personal retirement accounts, charitable contributions and school tuitions are not considered for the limit indicated above regarding personal deductions

186 Tax and Legal Services - PwC Mexico Double taxation relief Foreign source income is fully taxable in Mexico for tax residents. These are no exclusions except for those provided by tax treaties. The law provides relief from double taxation by allowing a limited foreign tax credit for taxes paid abroad by Mexican residents. In essence, the credit is allowed for foreign taxes paid up to the amount of foreign tax that would correspond to the income earned by a non-resident of that country or the actual amount paid, whichever is lower. Similarly, the law provides that tax treaty provisions override the provisions of the tax law, when they benefit the taxpayer.

Tax computation A typical tax computation is illustrated in Appendix X. Personal allowances and credits The personal allowances and credits available are given in Appendix IX. For credits, also see below. Tax rates The tax rate schedule for individuals shown in Appendix VII has a maximum rate of 35%. Some examples of the amount of tax payable by individuals at different levels of taxable income are shown in Table XIII.

XIII—Examples of Individual Effective Tax Rates

Annual Income Effective Tax payable Ps Tax rate

100,000.00 8,924 8.92%

250,000.00 40,107 16.04%

550,000.00 120,851 21.97%

1,050,000.00 277,851 26.46%

2,100,000.00 634,851 30.23% 20

3,250,000.00 1,028,351 31.64%

Tax credits An individual may claim a foreign tax credit in the annual tax return, subject to certain limitations, for any foreign income tax paid on foreign-source taxable income.

Doing Business in Mexico 2015 187 Other taxes Local taxes on income Some states impose taxes on salaries and wages, which are payable by the employer. Such tax may be from 2% to 3% of gross wages, without a cap. Some Mexican states may assess a local tax on specific activities such as independent personal services, rental income and sales of real estate. Wealth, gift and inheritance taxes No specific wealth or inheritance taxes exist in Mexico. For federal income tax purposes, inheritances are tax exempt. Recipients of gifts from a spouse or lineal descendant/ancestor (parent, grandparent, child, grandchild, etc.) are also income tax exempt. In most circumstances, in order to maintain the income tax exemption, gifts and inheritances must be disclosed in the recipient’s annual income tax return. Gifts from other sources exceeding three times the annual minimum wage are subject to federal income tax on the excess.

188 Tax and Legal Services - PwC Mexico Chapter 21 Taxation of trusts and estates

Investor considerations • Mexican trusts generally may only be created with domestic banks as trustees. In addition, insurance, bonding and brokerage companies can create trusts for specified purposes. • Generally, trusts are not taxable entities; they are conduits of income to beneficiaries. • Trusts have frequently been used to hold real property in the border zones and coastlines, where ownership by foreigners has been prohibited or otherwise limited. However, the foreign investment law now permits direct foreign investment in non-residential property if certain requirements are met, making trust vehicles unnecessary. • When business activities of a non-resident are carried out through a trust, a permanent establishment is deemed to exist for tax purposes, although applicable tax treaty provisions should be reviewed to determine if this rule is overridden. • There are certain tax incentives for trustees and beneficiaries who participate in Mexico through Real Estate Investment Trusts.

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Doing Business in Mexico 2015 189 Trusts Types of trusts The organization of trusts (fideicomisos) in Mexico is governed by the banking law (Ley de Instituciones de Crédito) and the Law of Credit Instruments and Operations (Ley General de Títulos y Operaciones de Crédito). Trusts are not legal entities. Therefore, they cannot own property and cannot open bank accounts in their own names. However, a taxpayer identification number is usually obtained. Trusts established by entities other than banks (insurance, bonding and brokerage companies can now create trusts for specified purposes) are governed by their applicable regulatory body laws. The trustee can generally only be a banking institution authorized to carry out fiduciary operations. With that exception and the fact that beneficiaries may only be individuals or corporate entities living or in existence at the time a trust is created, the rules applicable to trusts are quite flexible, and they can be organized for any lawful purpose. All trusts are of the same basic type, and their terms can be as complicated or as simple as required by the purposes for which they are created. When a trust is formed to hold title to real property, the trust instrument must be notarized and entered in the general property register of the locality. Trusts may be revocable or not. Taxation of trusts Generally, trusts are not considered taxpayers. However, when they are created to carry out business activities in Mexico; they are treated as conduits of income to beneficiaries (taxpayers) or, if these have not been named, to the trustor (grantor). Trusts set up to maintain the assets of approved funds have no tax obligations, if certain requirements as to their income are satisfied. Taxation of beneficiaries Where business activities are carried out through a trust the trustee is responsible for making advance payments of income tax on such activities and for determining the annual adjusted taxable income (utilidad fiscal) in accordance with the procedures applicable to corporations. Although the taxable income is attributable to the trustee, these duties are usually carried out by the management committee or principal beneficiary of the trust. Corporate beneficiaries should include their proportion of such tax profits in their own annual income tax returns and treat their proportion of the advance payments made by the trust as advance payments on account of their annual income tax liability. The losses, if any, cannot be transferred to beneficiaries until the trust is liquidated. Individuals who are beneficiaries must treat their proportion of the profits and advance payments as arising from business activities of unincorporated enterprises, as discussed in Chapter 20.

190 Tax and Legal Services - PwC Mexico In the case of rentals of real property held in trust, the income is considered to belong to the grantor, even though the beneficiaries are third parties, unless the transfer of title is considered as irrevocable and the grantor has no further rights to reacquire the property. The income is then considered to belong to the beneficiaries. In either case the trustee is held responsible for making advance payments of income tax in May, September and January at 10% of the gross rental income collected during the preceding four months (see also Mexican Real Estate Investment Trust, below). In other cases the income realized from assets held in trust will be considered as taxable to the beneficiaries. The appropriate capital gains treatment, depending on the beneficiary, would be accorded to sales of trust assets. Tax treatment of the grantor The transfer of assets to an irrevocable trust will normally be treated as a sale, taxable to the grantor, unless the trustor keeps the right to reacquire the assets. Rent on real property placed in trust but not yet on an irrevocable basis is also taxed to the grantor. Taxation of the constitution of trusts Transfers of real property to an irrevocable trust represent transactions subject to tax on the acquisition of real estate. If real or personal property is placed in trust for the benefit of others without reasonable compensation to the grantor, income tax on donations received may be payable by donees, other than a spouse or direct family members, if the value exceeds three times the annual minimum wage. Mexican Real Estate Investment Trust (MREIT’s) Mexican tax authorities grant some tax incentives to the MREIT’s are whose main activity is the construction or acquisition of real estate property for sale or lease. The treatment of this kind of trust differs from that of those described above, basically because the trustees and beneficiaries are exempt from making advance payments of income tax, on the income received by the MREIT’s. In addition, the transfer of real estate made by grantors will not be considered as a sale in accordance with the Mexican Income Tax Law if the grantor is a beneficiary of the trust or otherwise retains the right to reacquire the property. Use of trusts Trusts are not often used for tax planning but rather for other purposes, such as to facilitate the control of an estate paying benefits to various heirs, to guarantee loans and to enable foreigners to hold the rights to certain restricted residential real estate (see Chapter 5 and above). 21 Notwithstanding the above, the MREIT’s provide good opportunities for international investors. Planning ideas regarding financing structures and exit strategies are available.

Doing Business in Mexico 2015 191 Estate and gift taxes As noted in Chapter 20, no estate or inheritance taxes are levied by the federal government or local governments on the value of assets at date of death. During the period before an estate is finally distributed, the legal representative is required to pay income tax for the account of the heirs on the earnings of the estate considered as a unit. The tax paid in this way is considered final unless the heirs or beneficiaries of legacies elect to include their portion of the income in their own annual returns, in which case they may take credit for a proportionate amount of the tax paid by the legal representative. Moreover, transfers of property at death are not taxable for income tax purposes as concerns the transferor and Mexican resident transferees; although there may be real estate acquisition transfer tax considerations (usually ranging 1% to 5% of the value of transferred property). There is no separate gift tax per se other than the possible real estate acquisition tax mentioned above, although an income tax may apply for the transfer of property to persons other than spouses, lineal descendants and lineal ascendants, and in certain cases withholding taxes apply.

192 Tax and Legal Services - PwC Mexico Chapter 22 Value-Added Tax (VAT)

Investor considerations • VAT is levied on transfers of goods and services at a standard rate of 16% and at zero rate for some transactions. • Certain other transactions are exempt. • Imported goods and services are subject to VAT. • Charges for the use of assets (e.g., rentals and royalties) are subject to VAT. • Credit against VAT liability (which may result in overpayment and refund) may be taken for VAT paid on all imports and purchases, except as noted. • Credit for VAT paid may not be taken in proportion to revenues that are exempt from VAT or for VAT paid in goods and services that do not represent deductible expenses under the income tax law. • With the exception of purchases made by foreign tourists, there is no mechanism to recover the VAT paid by non-residents.

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Doing Business in Mexico 2015 193 Scope of Value-Added Tax The federal Value-Added Tax (Impuesto al Valor Agregado, IVA in Spanish) represents a one-time tax, payable by the ultimate consumer of all types of products and services. However, each business entity involved in the process from the sale of raw materials to the production and distribution of finished products to the ultimate consumer is generally required to bill its customers the tax on its products (output tax) and to pay the tax to its suppliers on its purchases of goods and services (input tax), crediting the amounts so paid against the amounts due on its own activities. The taxpayer is required to remit the excess of the VAT collected from its customers over the VAT it paid to its suppliers to the tax authorities on a monthly basis. If the amount paid exceeds the amount collected, a refund can usually be requested for the difference, credited against other VAT obligations, or compensate against other tax obligations. In general, VAT does not represent an additional cost to most business enterprises, because even though all types of business enterprises, including government departments and agencies, are required to accept charges of the tax by suppliers on their purchases of goods and services, such amounts will normally be eligible for offset against the liability of the business enterprises for the tax collected on their billings to customers. There will be some exceptions, principally when the sales of an enterprise are “exempt” from VAT, in which case the enterprise is treated as the last consumer and will have to absorb any charges for VAT (input taxes) on its purchases, except insofar as its activities are subject to the zero rate, as mentioned below. However, input tax paid on goods or services used to produce items that are exempt from VAT, may be deducted for corporate income tax purposes. (See “other deductions” in chapter 15). With few exceptions, VAT is a cash basis tax in the sense that only the receipt of payment for goods or services triggers the output VAT liability, and an input VAT credit can be claimed only when the taxpayer pays VAT to its suppliers of goods and services or when the liability to a creditor is satisfied through any other form of extinction or compensation. Thus, the net amount payable by each enterprise will generally be the difference between the tax that was effectively paid and the tax that was effectively collected.

Taxable transactions In general, VAT is payable on all sales of goods, independent services, rentals, and imports of goods and services, although a number of significant exceptions are provided in the law, as well as certain defined activities which are taxed at the zero rate (See Appendix XII).

194 Tax and Legal Services - PwC Mexico Sales of goods The law defines a sale as any transfer of tangible or intangible goods, including those made on a conditional basis or through irrevocable trusts. The taxable amount of a sale includes the sales price as well as all other amounts charged to the purchaser for other taxes, duties, interest, or charges of whatever nature.

Services Taxable services are considered to be those rendered within Mexico by one person to another on an independent basis, transportation of persons or goods, insurance and reinsurance, agency activities, technical assistance, and transfers of technology. The taxable amount includes not only the price of the service, but also charges to the customer for other taxes, living allowances, expenses, reimbursements, interest, etc. As an exception, when the interest arises from loans granted by financial system companies, from loans granted under credit lines or financial leasing transactions, the VAT related to such interest will be paid as the interest is accrued, instead of when paid or collected.

Rental of goods For purposes of VAT any type of rental of tangible property in exchange for a fee is taxable, regardless of the legal form utilized, subject to certain specified exceptions. Rentals of real property for residences and property used for agricultural purposes are exempt.

Imports VAT is payable by the importer to the customs authorities on all imports, in addition to normal import duties. The taxable value of imports of tangible goods is the value declared for import duties, plus the amount of the duties and other applicable taxes and fees. The VAT paid to customs authorities upon importation of goods is treated in the same way as VAT paid to Mexican suppliers and offsets the VAT liability collected from customers in determining the net amount owed to the government. Any tax payable on importations is entirely the responsibility of the resident importer, and in the case of imports of tangible assets, VAT must be paid before withdrawing these assets from customs. Imported services are also taxed. The purchase or licensing of intangible assets from non-residents for use in Mexico is a taxable import. In the case of importations of intangible assets or services, no VAT is actually paid, although the tax forms reflect a ¨virtual¨ payment or cashless transaction with an offsetting credit in the same monthly return, except when the taxpayer also has 23 “exempt” VAT sales output tax transactions in which case there could be a net cost to the company after reflecting the tax effect of deducting the VAT paid.

Doing Business in Mexico 2015 195 Services rendered by non-resident commission agents outside Mexico (commissions) on exports of merchandise are not subject to VAT. In other cases, imported services are subject to VAT as described above. Importations under the temporary regime are currently exempt from VAT. However, as from 2015, temporary importations made under specific customs regimes, such as those to be used in manufacturing processes by in-bond processing companies and for the automotive bonded warehouse regime will in principle be subject to payment of VAT. A tax credit may be available complying with specific requirements. Other temporary importations remain exempt from VAT (e.g. for the oil or aerospace industry).

Exports Exports are zero rated, and consequently VAT is not payable on exports, including exports of in-bond processing companies, commissions or mediation fees and technical fees for services provided to foreign residents when the benefit is received abroad, and rights to intangible assets. Even though the exporter does not collect VAT on export sales or these services, it has the right to recover input VAT charges on its purchases of goods and services by means of a credit or refund. Additionally, a zero rate applies to independent personal services provided by residents in Mexico that are used solely by and for the benefit of persons abroad without a permanent establishment in Mexico. Port services are also zero rated for export shipments.

Rate of tax VAT is payable on all types of operations at a general rate of 16%, except for almost all food products, medicines and other specific products, which are taxed at the zero rate.

Payments of tax The excess of VAT effectively collected from customers over VAT effectively paid to vendors (or to the customs authorities on imports) is generally required to be remitted to the tax authorities on a monthly basis as a definitive payment. The procedure for determining VAT payable consists of crediting directly against VAT due (effectively collected), the tax effectively paid for expenses related to acquisitions of goods and services, as well as expenses related to the temporary use of assets (i.e. rentals). Such expenses should be those that are indispensable for realizing taxable activities, including those that are taxable at the zero rate. When taxpayers carry out mixed activities (taxable, exempt or not taxable), they should identify VAT effectively paid for each item, in order to determine the amount not creditable paid on non-taxable items, as well as determining the proportional amount not creditable, from items not identifiable.

196 Tax and Legal Services - PwC Mexico Taxpayers subject to VAT withholding Certain taxpayers are required to withhold VAT on payments to suppliers of goods and services, including payments made to parties’ resident abroad for purchases or leases, among others. Some examples that might require VAT withholding by the payer for the asset or service include, payments to foreign persons for leased assets in Mexico, and purchases from foreign residents of inventory located in Mexico when such foreign resident does not have a permanent establishment within Mexican territory.

VAT Refunds and overpayment certification process Favorable balances in VAT returns must be claimed by the taxpayers as a credit against the tax due in subsequent months, until such balance is used up, requested as a refund for the total balance of the overpaid VAT, or offset against other Federal taxes

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Doing Business in Mexico 2015 197 198 Tax and Legal Services - PwC Mexico Chapter 23 Other indirect taxes

Investor considerations • A specific tax is levied on transfers of real property and the rights thereto. • Excise tax is levied on certain items (e.g., alcoholic beverages, cigarettes, gasoline) and services (e.g. gambling and telecommunication), often at substantial rates. • Various state and municipal taxes are levied, generally at much lower rates, on items that are not subject to federal taxes.

Tax on acquisition of real estate A local tax on the acquisition of real estate is levied on all types of transfers of real property and the rights thereto. In general terms, subject to the review of each state law or the Federal District Financial Code, this tax is payable by the person or entity that becomes the owner of the property, whether by purchase, donation, inheritance, contribution, merger, spin-off, liquidation, in trust, or otherwise. Real estate is defined as land or as land and the structures attached thereto. In the Federal District, the tax is calculated at a progressive rate; the maximum rate is about 4.9%, aside from the respective notary fees and other transfer costs. The tax base is the highest of the transfer price, the fair market value and the appraisal value of the property. Notary fees and other transfer costs often increase the purchase price by two or more additional points.

Federal excise and vehicle taxes The Production and Service Tax Law levies often substantial federal excise taxes on the supply of alcoholic beverages, cigarettes and other tobacco products, gasoline and diesel, energy and flavored drinks, fossil fuels, food with high caloric content and pesticides; as well as commission services related to the mentioned products, gambling and telecommunication services. In general terms, exports of goods are exempt from excise tax and excise tax paid on the acquisition of exported goods cannot be credited. 24 Federal taxes are also levied on the acquisition of new vehicles, as well as the ownership of motor vehicles.

Doing Business in Mexico 2015 199 State and municipal taxes Taxes levied by states and cities in Mexico are much lower than the federal levies, and in most cases are also lower than those of comparable entities in the United States and other countries. Municipal taxes are usually of minor importance. The states and municipalities may not tax transactions subject to Federal VAT, of which they receive a substantial share from the federal government. Other activities, such as banking, may also not be taxed at the local level. Brief general comments regarding state taxes are given below. Property taxes Annual taxes on real property are levied by the Federal District and all the states at widely varying rates applied to values shown in the property tax records, which in some cases are based on rental income from land and buildings held for rent to third parties. Assessed values have been increased substantially recently in the Federal District and some other areas. Title transfer taxes As stated above, the transfer of real estate is almost without exception subject to a variable transfer tax at rates averaging 3% to 4%. The tax is levied by most states and the Federal District. Taxes on earned income Some Mexican states levy a relatively low tax on salaries and other income earned by employees, which in most cases is payable by the employer (e.g., Mexico City imposes a 3% payroll tax payable by the employer). Tax opinion for Federal District taxes In the case of Mexico City and other States, a special purpose statutory tax opinion on the status of state taxes issued by an independent public accountant is required by the local authorities.

200 Tax and Legal Services - PwC Mexico Chapter 24 Tax treaties

Investor considerations • Mexico has tax treaties and agreements to exchange tax information with several countries and is in the process of negotiating others. • Most Mexico’s tax treaties follow the OECD model. • Tax treaties provide more flexibility in the type of activities that can be conducted in Mexico, without being considered a permanent establishment. • These treaties reduce or eliminate certain withholding taxes.

Tax treaty policy A number of tax treaties have been executed with Mexico’s most important trade and investment partners and other countries of strategic interest.

Treaty models Mexican treaties are modeled after the 1977 OECD Model Convention. Mexico has registered some reservations about the OECD commentaries.

Treaty provisions Treaties mainly restrict the definition of a permanent establishment and reduce or eliminate certain withholding taxes. (See Appendix V and VI).

Exchange of information Mexico has executed agreements to exchange tax information with several countries following the OECD Model. It is the stated intention of the Mexican government to execute similar agreements with other countries as a prelude to signing comprehensive tax treaties. (See Appendix VI). Through general rules, the Mexican tax authorities issue a list of treaties that are considered to have a “Comprehensive exchange of information treaty” with Mexico. This is the list of countries that, under the Mexican Tax Authorities criteria, are effectively exchanging information with Mexico. Specific benefits are granted 25 under Mexican tax law for those countries, such as second tier foreign tax credit and the reduction of other reporting obligations regarding investments in tax havens or preferred tax regimes.

Doing Business in Mexico 2015 201

I

Appendix I Corporate tax rates

Corporate tax rates General rate The tax rate for corporate taxpayers is 30%. Special industry rates Two special regimes will be in place for the primary sector and for truck freight service, which, generally speaking, continue to provide the same benefits applicable up to 2013 with certain modifications, principally: 1. Coordinated entities managing and operating fixed assets and land directly or indirectly related to freight or passenger transportation may continue to comply with their tax obligations through the coordinating entity, on the basis of the rules for individuals engaged in business activities. The tax authorities may grant a simplified approach to support deductions of up to 4% of their income, and allow a compliance with withholding obligations by applying a tax not exceeding 17% from amounts disbursed. 2. Agricultural, cattle breeding, forestry and fishing activities, applicable to taxpayers engaged exclusively in that sector, with tax determined as follows: a. Entities will have an exemption on an amount equivalent to 20 times the general minimum wage for the geographic area corresponding to the taxpayer, calculated per year for each member, not to exceed 200 times the general minimum wage for the Federal District. b. Individuals will have an exemption of an amount equivalent to 40 times the general minimum wage for the geographic area corresponding to the taxpayer, calculated for the year. c. Entities and individuals with income of up to an amount equivalent to 423 times the general minimum wage for the geographic area of the taxpayer, calculated for the year, will have the aforementioned exemptions, as well as a reduction of tax on the excess, i.e., 40% for individuals and 30% for entities, that is to say, they will apply the effective tax rate of 21%. d. Individuals and entities with income exceeding an amount equivalent to 423 times the general minimum wage for the geographic area of the taxpayer, calculated for the year, apply the above-mentioned exemption and tax deduction and must determine and pay tax at the rate of 30% or at the rate applicable for calculating tax payable by individuals.

Doing Business in Mexico 2015 203 II

Appendix II Tax depreciation rates Maximum annual rates of depreciation for income tax purposes, calculated on a straight-line basis only.

Rate per Type of asset annum % Deferred charges 5 Deferred expenses and intangible fixed assets, including certain payments for patents, 15 trademarks, technical assistance, or transfer of technology. Pre-operating expenses. 10 Fixed assets normally used by business enterprise: Buildings and other construction. 5 Railways. 5 Railroad cars, locomotive and ships. 6 Furniture and office equipment. 10 Airplanes, except for aviation companies and airplanes used for crop-dusting. 10 Heavy-duty trucks and trailers, buses, automobiles, and light trucks. 25 Bullet-proofing for automobiles. 25 Airplanes for crop-dusting. 25 Computers (laptops y PC’s), servers, printers, optical readers, barcode readers, scanners, 30 external hard drives and computer networking hubs. Equipment for control of pollution 100 Equipment for research and product development 35 Tools and dies 35 Equipment for conversion to consumption of natural gas 100 Specialized cash registers for tax compliance 100 Machinery and equipment for the following activities: Generation, conducting, transmission and distribution of electricity 5 Electric transportation equipment 10 Processing grain products, sugar and sugar products, edible oils, ocean, river and lake 5 transportation companies Manufacture of products derived from coal; primary production of metals; tobacco products 6 Petroleum and natural gas; production of paper and similar products 7 Manufacture of motor vehicles and parts; railroad and ship construction; manufacture of metal products; scientific and professional machinery and instruments; production of food and 8 beverages (except grains, sugar, edible oils and their products) Tanning and manufacture of leather products; chemical and petrochemical products; manufacture of basic products for plastics; rubber products; printing and publishing; 9 pharmaco-biological products Manufacture of clothing and textiles; finishing, dyeing and stamping of textile products 11 Construction of airplanes 12 Overland transportation companies (freight and passenger); mining industry 12 Air transportation companies 16 Radio and television transmission and telegraph 16 Construction industry 25 Farming, timber 25 Fishing, cattle rising 25 Restaurants 20 Manufacturing, assembly and processing of magnetic components for hard drives and cards for 50 the computer industry Other types of activities not specified above 10 Note: In the case of enterprises whose operations include more than one type of the business activities mentioned in the law, the rate of depreciation to be used will be that provided for the principal activity, determined on the basis of the relative volume of income in the previous year.

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Appendix III Corporate income tax and employee profit sharing calculations

2014 Taxable income Profit-sharing

Net income per books before taxes Ps 10,000,000 Ps 10,000,000 Add- Non-deductible expenses: Excess provision for bad debts over specific losses deductible 180,000 180,000 Entertainment and other miscellaneous non-deductible 920,000 920,000 expenses (Note a) Inflationary annual adjustment (Note b) 200,000 200,000 Taxable inventory (Note c) 1,400,000 1,400,000 Non-deductible exempt salaries (47% or 53%) [*3] 500,000 13,200,000 12,700,000

Deduct: Depreciation of fixed assets, adjusted for inflation, in excess 300,000 300,000 of book depreciation Taxable Income 12,900,000 12,400,000

Employee profit sharing paid in the year (based on prior year 100,000 results) (*1) NOL’s amortized from prior years (*2) 120,000 Net taxable income 12,680,000 12,400,000

Corporate income tax @ 30% 3,804,000 Employee profit sharing @ 10% 1,240,000

* The only differences between the tax base for income tax and Employees’ Statutory Profit-Sharing (ESPS) are: 1. ESPS paid in the period 2. Amortized tax losses 3. 47% or 53% of non-deductible exempt salaries 4. Historic immediate depreciation for fixed assets deducted in prior periods.

Notes: a. Includes non-deductible travel expenses and automobile depreciation that do not meet all deductibility requirements. b. Inflationary annual adjustment is calculated on an annual basis taking the monthly average of accounts receivable and liabilities and applying the annual increase in the National Consumer Price Index. c. As from 2005, the deduction of purchased merchandise was replaced by a deduction of the Cost of Goods Sold. Such cost will be deductible in the year in which the income arising from the sale of goods is recognized. Special provisions apply for the inventory that was acquired before December 31, 2004, to proportionally increase include the inventory deducted as taxable income through 2016.

Doing Business in Mexico 2015 205 IV

Appendix IV Withholding taxes – Taxation of shareholders

Dividend/profit distribution tax rates A dividend or profit distribution must be grossed up by a factor of 1.4286, if in excess of the after-tax earnings account (Cuenta de Utilidad Fiscal Neta or “CUFIN”). As a consequence, the company paying the dividend is subject to a corporate tax at an effective tax rate of 42.86%. The tax so anticipated is creditable currently or in the following two years, against corporate tax liabilities. For individual shareholders there is also a new 10% tax on dividends received from Mexican corporations to the extent the dividends come from income generated after 2013.It must be withheld by the Mexican corporation, and it is a final tax. In addition the individual must report the dividend in his annual tax return and pay income tax up 35% net of the deemed credit for the 30% Mexican corporate tax paid.

After-tax earnings account (CUFIN) - determination of balance In broad terms, the CUFIN account represents a Mexican company’s net taxable income less reinvested earnings, income taxes, profit sharing distributions, dividends paid and other non-deductible items. The annual taxable income (i.e., Utilidad Fiscal, “UFIN”) is a concept that attempts to reflect the true economic earnings of the company. The starting point in determining the annual UFIN of a company is the company’s net taxable income for the year after any deductions for net operating loss carry forwards and the profit sharing paid for the prior year. The company’s net taxable income is then reduced by income taxes, profit sharing of the year and, in general, certain other non-deductible expenses incurred by the company during the year, to arrive at the company’s UFIN for the tax year. Upon the determination of this amount, the resulting amount is then added to the accumulated CUFIN balance (adjusted for inflation) from previous years. For 2014, the determination of the balance of CUFIN must be carried out as follows: Balance of after-tax earnings account of the previous year (Note 1) Plus: Less: After-tax earnings of the current fiscal year. Dividends paid by the company Dividends received from Mexican entities. Capital Redemptions. Dividends received from a Preferred Tax Equals: Regime (Tax Haven). Ending balance of the after-tax earnings account.

206 Tax and Legal Services - PwC Mexico IV

Note 1: Prior to adding the UFIN of the year, the beginning balance in the CUFIN account is adjusted for inflation from the date of the last inflation adjustment up to the last month of the current tax year; the current year UFIN, however, is not included in the adjustment. If a dividend is distributed during the year, the CUFIN account is adjusted for inflation from the beginning of the period up to the month in which the dividend is distributed. The CUFIN is then increased by the amount of dividends received from other companies resident in Mexico, by the amount of distributions from a joint venture arrangement and by previously recognized income, dividends or gains received from investments in preferred tax regimes. In turn, any deemed and actual dividends or other income distributions made in cash or in kind along with any capital reductions which in accordance with the Mexican Income Tax Law affect CUFIN are subtracted from the company’s CUFIN balance. For purposes of this calculation, dividends and other distributions which are reinvested in the company as a capital contribution within 30 days of the date of distribution are not included. Dividends received from other Mexican companies generally increase CUFIN regardless of whether or not such dividends are attributable to the distributing company’s CUFIN account. In determining the amount of the CUFIN account that exists at the date of a distribution, the balance as of the end of the prior tax year is used. However, such amount is adjusted to take into account any dividends received (an upward adjustment) or paid (a downward adjustment) by the corporation during the period of time between the close of the prior tax year and the payment date of the dividend, plus an inflationary adjustment for that same period. As such, current year earnings are not taken into account for purposes of determining whether there is a sufficient CUFIN account balance to cover the distribution. Annual earnings are only included once the annual return is filed, usually by March 31 following the end of the fiscal year. Computation of after-tax earnings Taxable Income Less: Income Tax due for the year. Non-deductible expenses, except general reserves and provisions and the Employees Statutory Profit Sharing Paid. Equals: After-tax earnings

Doing Business in Mexico 2015 207 V

Appendix V Withholding taxes – Payments to non-residents

Income tax must be withheld from payments to non-residents, both corporations and individuals, by resident corporations and individuals. The tax is applicable to gross income in each case, unless otherwise indicated in the notes following the table.

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Withholding tax rates provided by the Mexican Income Tax Law % Professional fees for services rendered in Mexico 25 Members of boards of directors and advisory boards 25 Lease payments: Lease of real property 25 Lease of containers, airplanes, and ships authorized by the Mexican Government to be 5 commercially exploited in the transportation of goods or persons Time-sharing services (1) 25 Charter agreements 10 Sales: Real property located in Mexico (1) 25 Shares of Mexican companies (1, 2) 25 Transfers of ownership of Mexican public debt by other than the original creditors (intended 25 to cover debt-for-equity swaps) (1) Derivative transactions: On capital (1) 25 Same rates On debt (3) applicable to interest Interest (4): Paid to foreign government financing entities, to duly registered foreign banks and other entities that provide financing with funds obtained by issuing publicly traded debt 10 instruments abroad, registered with the Ministry of Finance (5) Interest on debt instruments publicly traded (6) 4.9 Interest payments to specific foreign financial institutions (7) 4.9 Other interest payments (not otherwise included above) paid by Mexican financial 21 institutions to residents abroad Paid to foreign suppliers of machinery and equipment, to others to finance purchases of 21 such assets or inventory or working capital loans Paid to reinsurance entities 15 Other interest payments (11) 35 Financial leases (on the portion deemed to qualify as interest or finance charge) 15 Dividends 10 Royalties (8): For the use of railroad cars 5 For the use of copyrights on scientific, literary, or art works, including motion pictures and radio and television recordings, as well as software and payments for the transmission of 25 video and audio signals via satellite, cable, optical fiber, and similar media On patents, invention or improvement certificates, trademarks, brand names, and 35 advertising (11) For the use of drawings or models, plans, formulas, or procedures, and of scientific, commercial, and industrial equipment; on amounts paid for information regarding 25 scientific, commercial, and industrial experience. Technical Assistance 25 Short-term construction, and the respective installation, maintenance, technical direction or 25 supervision (9) Reinsurance premiums 2 Income obtained by athletes and artists (1) 25 Income derived from prizes (e.g., lottery tickets or raffles) (10) 1or21 Other income (forgiven debts, indemnifications, rights to participate in business, investments, 35 etc.) (11) V

Notes: 1. The non-resident may elect to pay tax at a rate of 35% on the net taxable profit, in the case of (i) time-sharing services, (ii) share sales, (iii) sales of real property, (iv) activities of sportsmen/artists, and (v) short terms construction and to the extent that the following specific requirements are met: i. For time-sharing services, the resident legal representative must keep his audited financial statements available for inspection by the Mexican Tax Administration. ii. For share sales, a tax report issued by a registered public accountant is required and the foreign taxpayer should not be a resident of a country classified as a tax heaven or a country with a preferred tax regime, note that additional requirements should be met. It should be noted that there is an option to defer Mexican income tax arising from the sale of shares within the same group due to a corporate reorganization provided certain pre-closing requirements are met (i.e. previous authorization from the tax authorities is required). No legal representative is required for sales of real property by public deed. iii. A tax rate of 40% on the net gain would apply in debt for equity swap transactions provided that the non-resident recipient of the income has a legal representative resident in Mexico, and this election is available if the income obtained by the foreign taxpayer is not subject to a preferred tax regime. 2. The sale of shares through the Mexican Stock Exchange is subject to a 10% withholding income tax. When the investor is a resident in a country with which Mexico has signed a tax treaty, such withholding will not apply if certain requirements are satisfied. 3. The applicable withholding rate (based on the withholding tax rates for interest) for debt-derivative transactions is applied on a net basis, that is, gross income less authorized deductions. However, if the transaction is liquidated in kind, the applicable withholding rate (on the same net basis) is 10%. 4. Interest payments to non-residents are exempt from Mexican income tax when they are paid on the following. i. Loans to the federal government or to the Bank of Mexico (Central Bank) or bonds issued by the latter organization to be acquired and paid abroad. ii. Loans for three or more years granted or guaranteed by duly registered financial entities that promote exports through special financing. iii. Preferential loans granted or guaranteed by foreign financial entities to institutions authorized to receive tax-deductible donations in Mexico, provided these institutions are properly registered and use the funds for purposes consistent with their status. iv. Loans derived from bonds issued by the Federal government or the Bank of Mexico placed on a recognized national stock exchange, to the extent the beneficial owner is a foreign resident. 5. In 2014, 4.9% is applicable when the interest is paid to registered banks resident in countries with which Mexico has signed a tax treaty. This is a provision that has been issued on a yearly basis for many years. 6. The 4.9% withholding rate applies provided the placement is handled through banks or brokerage firms resident in a country with which Mexico has signed a tax treaty, if there is compliance with the information requirements established in the general rules issued by the Ministry of Finance. If there is failure to comply with these requirements, the 10% withholding rate applies. The 4.9% and 10% withholding rates mentioned in the preceding paragraphs do not apply, and instead a 35% (30% in 2013) (see note 11 below for the rate applicable thereafter) withholding rate is applicable to interest, when the direct or indirect beneficiaries of the interest, either individually or jointly with related parties, receive more than 5% of the interest arising from the instrument in question, and are either (a) holders of more than 10% of the voting shares of the issuing company, either directly or indirectly, either individually or jointly with related parties, or (b) business entities holding more than 20% of their shares, either directly or indirectly, either individually or jointly with parties related to the issuer. 7. The 4.9% tax withholding rate is applicable to interest payments made to foreign financial institutions in which the Mexican federal government or the Mexican Central Bank has equity participation. 8. The withholding tax rate is applied to the gross amount of the payment. 9. The non-resident taxpayer may elect to pay 35% tax on the net profit in 2014, if the taxpayer has a Mexican resident legal representative and so advises the customer, who then makes no withholding. When business activities last for more than 183 days, the foreign taxpayer is deemed to have a permanent establishment in Mexico for tax purposes and is taxed in the same manner as a local resident corporation. 10. The 21% federal rate is applied only in the case of non-qualifying prizes (i.e., income derived from prizes that is subject to a state taxation that exceeds a rate of 6%). 11. A 35% income tax withholding rate is applicable for2014. The statutory withholding rates mentioned above may be reduced by applying tax treaty provisions, discussed below.

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Payments to residents of treaty countries As of January 2014, the treaties with the following countries are pending ratification while waiting for the completion of specific formalities by the respective governments in order to become effective, have not been published yet in the Official Gazette, or are under negotiation: Jamaica, Lebanon, , Malta, Morocco, Nicaragua, , Peru, Saudi Arabia, Slovenia, , Turkey, United Arab Emirates, and Venezuela. During the last decade, Mexico has embarked on a policy of negotiating a network of tax treaties with its principal trading and investment partners, these treaties provide reduced tax withholding rates. These include the following:

Dividends Substantial Portfolio Interest Royalties holdings % % % % Australia 15 0 (1) 10, 15 (25) 10 Austria 10 5 (4) 10 10 Bahrain 0 0 4.9/10(20) 10 Barbados 10 5 (1) 10 10 Belgium 15 5 (2) 10, 15 (16) 10 Brazil 15 10 (6) 15 10, 15 (27, 29) Canada 15 5 (4) 10 10 Chile 10 5 (6) 5, 15 (26) 5,10 (29,30) China 5 (7) 5 (7) 10 10 Colombia 0 0 5/10 10 Czech Republic 10 (7) 10 (7) 10 10 Denmark 15 0 (3) 5, 15 (17) 10 Ecuador 5 (7) 5 (7) 10, 15 (16) 10 Estonia 0 0 4.9/10 10 Finland 0 0 10, 15 (24) 10 France 0, 5 (9) 0, 5 (9) 5, 10 (17, 29) 10 (29) Germany 15 5 (1) 5, 10 (18) 10 Greece 10 (7) 10 (7) 10 10 Hong Kong 0 0 4.9/10 (20) 10 Hungary 15 5(1) 10 10 Iceland 15 5 (1) 10 10 India 10 (7) 10 (7) 10 10 (31) 10 (7) 10 (7) 10 10 Ireland, Rep. of 10 5 (4) 5, 10 (17, 29) 10 Israel 10 5 (10) 10 10 Italy 15 (7) 15 (7) 10 (29) 15 Japan 15 5 (8) 10, 15 (25) 10 Korea, Rep. of 15 0 (1) 5, 15 (17) 10 Kuwait 0 0 4.9/10 (20) 10 Latvia 10 5 5/10 10 Lithuania 15 0 10 10 Luxembourg 15 8 (11) 10 10 Netherlands 15 0 (12) 5, 10 (21) 10 (28) 15 (7,13) 15 (7,13) 10 10 Norway 15 0 (3) 10, 15 (16) 10

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Dividends Substantial Portfolio Interest Royalties holdings % % % % Panama 7.5 5 (32) 5, 10 (17) 10 (33) Poland 15 5 (3) 10, 15 (19) 10 Portugal 10 (7) 10 (7) 10 10 Qatar 0 0 5/10 10 Romania 10 (7) 10 (7) 15 15 Russia 10 (7) 10 (7) 10 10 Singapore 0 0 5, 15 (17) 10 Slovak Republic 0 (14) 0 (14) 10 10 South Africa 10 5 (1) 10 10 Spain 15 5 (3) 5, 10, 15 (21, 22, 29) 10 Sweden 15 5 (5) 10, 15 (16) 10 Switzerland 15 0 (34) 5,10 (35) 10 Ukraine 15 5 10 10 United Kingdom 0 0 5, 10, 15 (21, 23) 10 United States 10 5 (4, 15) 4.9, 10, 15 (20, 23) 10 Uruguay 5 (7) 5 (7) 10 10

The numbers in parentheses refer to the following numbered Notes. The applicable tax rates on dividends paid abroad in accordance with the tax treaties executed by Mexico are detailed below. However, please note that dividends paid from Mexico to parties resident abroad are subject to withholding tax in Mexico under domestic law since January 1, 2014 on profits generated after such date.

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There are certain specific cases of interest paid to parties resident abroad that might be exempted by certain tax treaties (e.g., interest paid to a pension fund or paid by a bank, interest paid on certain loans granted or guaranteed by certain entities for exports under preferential conditions, etc.), which are not detailed in the information below. 1. This rate applies when the recipient corporation that is the beneficial owner of the dividend (except for civil partnerships) directly owns at least 10% of the capital of the distributing corporation. In the case of Barbados, Hungary, and South Africa, the specific exclusion of civil partnerships is not included. 2. This rate applies where the company that is the beneficial owner of the dividends directly or indirectly owns at least 25% of the capital of the distributing company. 3. This rate applies where the company that is the beneficial owner of the dividends (except for civil partnerships) directly owns at least 25% of the capital of the company distributing the dividends. In the case of Norway, taxation is limited to the country of residence of the party receiving the dividends, provided the aforementioned substantial holding rule is satisfied. 4. This rate applies where the recipient corporation that is the beneficial owner of the dividend owns at least 10% of the voting shares of the paying corporation. The Mexico-US tax treaty contains a most-favoured nation clause. 5. This rate applies where a company that is the beneficial owner of the dividends (except for civil partnerships, although limited liability partnerships are included) directly owns at least 10% of the voting shares of the company distributing the dividends. 6. This rate applies where a company that is the beneficial owner of the dividends owns at least 20% of the voting shares of the company paying the dividends. 7. This is the maximum WHT rate for dividends, with no distinction for substantial holdings. In the case of Ecuador and India, the tax payable on dividends paid to residents in Mexico must not exceed a limit established in the treaty. 8. The 5% rate applies when a company that is the beneficial owner of the dividends owns at least 25% of the voting shares of the company paying dividends during the six months prior to the end of the tax period in which dividends are paid. Under certain particular rules and provided this ownership requirement is complied with, dividend payments are only subject to tax in the country of residence of the recipient of the dividends. 9. No withholding applies when more than 50% of the shares of the recipient corporation are owned by residents of France or Mexico or when the beneficial owner of the dividend is a resident individual. Accordingly, the WHT applies to dividends when more than 50% of the recipient corporation’s shares are owned by residents of other countries. However, the WHT must not exceed 5% when the party receiving the dividend is the effective beneficiary of said dividend. Dividends paid by a company resident in France to a resident of Mexico, other than a company that directly or indirectly holds at least 10% of the capital stock of the first-mentioned company, may also be taxed in France, in accordance with the law of France, but if the recipient of the dividends is the beneficial owner, the tax thus charged must not exceed 15% of the gross amount of the dividends. 10. The 5% rate applies where the company that is the beneficial owner of dividends directly or indirectly owns at least 10% of the capital of the company distributing the dividends. There is a 10% tax rate that applies when these same ownership requirements are complied with, but the company paying dividends is a resident of Israel (provided dividends are paid from earnings taxed in Israel at a tax rate lower than the regular corporate tax rate in Israel).

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11. The applicable tax rate on the gross amount of the dividends when the recipient company (beneficial owner) (except for civil partnerships) directly holds at least 10% of the capital of the corporation paying the dividend must not exceed 5% in the case of Luxembourg and 8% in the case of Mexico. The protocol of the Mexico-Luxembourg tax treaty states that this rate might be reviewed in the future by the contracting states if the WHT is not fully creditable, and can be adjusted under the principle of avoiding double taxation, provided the adjusted WHT rate is not lower than 5%. 12. Dividends paid by a company resident in Mexico to a company resident in the Netherlands (which is the beneficiary of said dividends) are subject to a maximum tax of 5% on the gross amount of the dividends if the beneficial owner is a company that directly or indirectly owns at least 10% of the capital of the company paying said dividends. However, as long as a company resident in the Netherlands is not subject to Dutch income tax on dividends received from a company resident in Mexico under the terms of the Dutch income tax law and any future amendments thereto, the dividends mentioned in the preceding paragraph may only be taxed in the Netherlands (not in Mexico). 13. The Mexico-New Zealand tax treaty contains a most-favoured nation clause that may be applicable in the future. 14. The exemption on dividend WHT is not applicable in the case of deemed dividends. 15. To the extent certain requirements provided in the Protocol are met, the WHT may be reduced to 0%. 16. The 10% rate applies to loans from banks. 17. The 5% WHT rate is applicable to interest paid to banks. 18. The 5% rate applies to interest on loans from banks, insurance companies, and retirement and pension plans. 19. The 10% rate applies to interest on loans from banks, insurance companies, and securities regularly and substantially traded on a recognized national stock exchange. 20. The 4.9% rate applies to interest on loans from banks and insurance companies and to interest on securities regularly and substantially traded on a recognized national stock exchange. 21. In the case of the Netherlands, the 5% rate applies to interest on loans from banks and to interest on securities regularly and substantially traded on a recognized national stock exchange. In the case of Spain and the United Kingdom, the 5% rate extends to interest paid to insurance companies. 22. The 10% rate applies to interest paid by financial institutions and interest paid to the original seller of M&E. 23. The 10% rate on interest applies in the case of interest paid to the original seller of M&E and interest paid by banks. 24. The 10% rate applies to interest on loans from banks and to interest derived from bonds or securities that are regularly and substantially traded on a recognized securities market, as well as to interest paid by the purchaser of M&E to a beneficial owner that is the seller of the M&E.

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25. The 10% rate applies to interest on loans from banks and insurance companies, to interest on securities regularly and substantially traded on a recognized national stock exchange, to interest paid to the original seller of M&E in a sale on credit, and to interest paid by banks. 26. The 5% rate is applicable to interest on loans granted by banks and insurance companies, securities traded on a recognized securities market, and the sale on credit of M&E. 27. It is understood that the definition of royalties applies to any type of payment received for the provision of technical assistance services. The 15% rate applies to royalties arising from the use of, or the right to use, trademarks. 28. The original rate is 15% but has been reduced to 10% as long as the Netherlands does not impose a WHT. 29. Reduced WHT rate results from the application of the most-favored nation clause. 30. The 5% rate applies to industrial, commercial, and scientific equipment. 31. The 10% rate also applies to fees for technical assistance, which are payments of any kind, other than those mentioned in Articles 14 and 15 of the treaty as consideration for managerial or technical or consultancy services, including the provision of services of technical or other personnel. 32. This rate applies where the company that is the beneficial owner of the dividends directly owns at least 25% of the capital of the distributing company. 33. The treaty broadly defines royalties and includes payments related to certain software. 34. This rate applies where the company that is the beneficial owner of the dividends directly or indirectly owns at least 10% of the capital of the distributing company. 35. The 5% rate applies on the gross amount of the interest paid to, among others, banks and insurance institution.

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Appendix VI Tax treaties

Tax treaties in force

Argentina1 Costa Rica2 Ireland Poland

Australia Chile Isle of Man2 Portugal

Austria China Israel Qatar

Bahamas2 Czech Republic Italy Romania

Bahrain Denmark Japan Russia

Bailiwick of Guernsey2 Ecuador Korea Samoa2

Bailiwick of Jersey2 Estonia Kuwait Singapore

Barbados Finland Latvia Slovakia

Belgium France Lithuania Spain

Belize2 Germany Luxembourg South Africa

Bermuda2 Greece Netherlands Sweden

Brazil Hong Kong Netherland Antilles2 Switzerland

Canada Hungary New Zealand Ukraine

Cayman Island2 Iceland Norway United Kingdom United States of Colombia India Panama America Cook Islands2 Indonesia Peru13 Uruguay

Source: Service Tax Administration, May 2014

Treaties under negotiation or not in force yet

Argentina Liechtenstein2 Oman Turkey

Aruba2 Malaysia Pakistan United Arab Emirates

British Virgin Islands2 Malta Santa Lucia2 Vanuatu2

Costa Rica Marshall Islands2 Saudi Arabia Venezuela

Gibraltar2 Monaco2 Slovenia

Jamaica Morocco Thailand Turks and Caicos Lebanon Nicaragua Islands2 Source: Service Tax Administration, May 2014

1 Only regarding international transportation 2 For comprehensive exchange of information 3 Applicable as from January 1, 2015

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Appendix VII Individual tax rates

Calendar year 2014 Annual Tax rates

Tax on Lower % Tax on Excess Over Lower Limit Upper Limit Limit Lower Limit Ps Ps Ps % 0.01 5,952.84 0.00 1.92

5,952.85 50,524.92 114.29 6.40

50,524.93 88,793.04 2,966.91 10.88

88,793.05 103,218.00 7,130.48 16.00

103,218.01 123,580.20 9,438.47 17.92

123,580.21 249,243.48 13,087.37 21.36

249,243.49 392,841.96 39,929.05 23.52

392,841.97 750,000.00 73,703.41 30.00

750,000.01 1,000,000.00 180,850.82 32.00

1,000,000.01 3,000,000.00 260,850.81 34.00 3,000,000.01 Above 940,850.81 35.00

Sample computation of annual tax Annual tax Assumptions Nontaxable benefits equal 20% of total remuneration.

Computation

Annual Gross remuneration Ps 100,300.00

Less—Non taxable benefits (20%) 20,060.00 Taxable remuneration 80,240.00 Lower limit of bracket 50,524.93 Excess over lower limit 29,715.07 Marginal tax 3,233.00 (29,715.07 at marginal tax rate of 10.88%) Tax on lower limit 2,966.91 Net tax liability Ps 6,199.91

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Appendix VIII Monthly individual withholding tax rates

Calendar year 2014 Monthly withholding tax rates

Tax on Lower % Tax on Excess Over Lower Limit Upper Limit Limit Lower Limit Ps Ps Ps % 0.01 496.07 0 1.92 496.08 4,210.41 9.52 6.4 4,210.42 7,399.42 247.23 10.88 7,399.43 8,601.50 594.24 16 8,601.51 10,298.35 786.55 17.92 10,298.36 20,770.29 1,090.62 21.36 20,770.30 32,736.83 3,327.42 23.52 32,736.84 62,500.00 6,141.95 30 62,500.01 83,333,33 15,070.90 32 83,333,34 250,000.00 21,737.57 34 250,000,01 An above 78,404.23 35

The above income brackets will be adjusted to reflect the increase in the National Consumer Price Index, once the index has increased more than 10% after the previous adjustment.

Salary subsidy A refundable credit that is capped applies to the income used to calculate income tax

Taxable Income Monthly Salary Tax Credit Lower Limit Upper Limit Ps Ps Ps 0.01 1,768.96 407.02 1,768.97 2,653.38 406.83 2,653.39 3,472.84 406.62 3,472.85 3,537.87 392.77 3,537.88 4,446.15 382.46 4,446.16 4,717.18 354.23 4,717.19 5,335.42 324.87 5,335.43 6,224.67 294.63 6,224.68 7,113.90 253.54 7,113.91 7,382.33 217.61 7,382.34 And above 0.00

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Sample computation of monthly net withholding tax Assumptions Nontaxable benefits equal 20% of total remuneration.

Computation

Monthly Gross remuneration Ps 78,000.00 Less—Nontaxable benefits (20%) 15,600.00

Taxable remuneration 62,400.00

Lower limit of bracket 32,736.84

Excess over lower limit 29,663.16 Marginal tax 8,898.95 (29,663.16 at marginal tax rate of 30%) Tax on lower limit 6,141.95 Tax liability Ps 15,040.90

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Appendix IX Personal allowances

As noted in Chapter 20, resident taxpayers may claim certain deductions to reduce the taxable income.

Expenses The following expenses are deductible as long as they are supported by the corresponding electronic invoices: • Medical expenses disbursed in Mexico, for the portion which has not been reimbursed by a medical insurance. These include medical, dental and hospital bills for the taxpayer, spouse or common-law spouse, descendants, parents, or grandparents, as long as the annual income earned by the family member does not exceed one annual minimum wage. Medical insurance premiums are also deductible. Medicines are not deductible, unless included in a hospital bill. • Funeral expenses up to an amount not exceeding one annual minimum wage, applicable to the family members indicated above. • Charitable contributions to tax exempt organizations that are authorized to receive donations. The deductible amount should not exceed 7% of the taxpayer’s previous year taxable income. • The paid mortgage inflation adjusted interest, related to the purchase of the taxpayer personal residence, subject to certain limits. • Complementary contributions to social security retirement fund (AFORE) or Mexican personal retirement account. This deduction is capped at 10% of individual’s taxable income and the contributions must not exceed five times the annual minimum wage of the taxpayer’s geographical area. • School transportation for economic dependents, when it is mandatory by the institution.

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Also based on a presidential decree, the school tuition paid may also be deducted in the annual tax return, subject to certain limits. In order to claim the deductions related to medical expenses, school tuition and transportation, the disbursement should be made through the following payment mechanisms: wire transfer from the taxpayer’s bank account, credit / debit card or cheque issued by the taxpayer. The total personal deductions amounts for the year is limited, therefore it may not exceed the lesser of the following: • Amount equivalent to 4 times the annual minimum wage that corresponds to the geographical area of the taxpayer • Amount equivalent to 10% of the taxpayer´s gross income, including exempt income. The Contributions to personal retirement accounts, charitable contributions and school tuition are not considered for the limit indicated above regarding personal deductions.

Credits

Foreign Tax Credit An individual may claim a foreign tax credit in the annual tax return, subject to certain limitations, for any foreign income tax paid on foreign-source taxable income.

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Appendix X Individual income tax calculation

Calendar year 2014 Assumptions The following assumptions are made in the tax computation below. The individual is a tax resident alien who earns salary and other personal income.

Mx Pesos

Salary, allowances and bonus 1,000,000

Certain fringe benefits 100,000

Investment income from abroad, on which a foreign tax of 30% (Ps 16,500) was paid to the 55,000 foreign country on a non-resident basis

Long-term capital gains on sales of shares in 30,000 Mexican stock market

Total income 1,185,000

Allowable deductions comprise the following:

Medical expenses 30,000.00

Charitable contributions 15,000.00

45,000.00

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Tax computation

Mexican Pesos Income - Salary, allowances, bonus, and fringe benefits 1,100,000 Less - Earned income exclusions: Non-taxable fringe benefits - 100,000 Excludable portion of Christmas bonus - 2,019 Excludable portion of vacation premium - 1,009 - 103,028 996,972 Add - Foreign-source investment income 55,000 1,051,972 Deductions: Medical Expenses 30,000.00 Charitable contributions 15,000.00 45,000

Taxable Income Ps 1,006,972 Income tax (Art. 152 MITL) 263,221 10% Income tax on sales of shares in Mexican stock market 3,000 Less - Foreign tax credit (Note) 16,500 Net tax liability Ps 249,721

NOTE: The foreign tax credit allowed is the lesser of the foreign tax paid on the foreign-source income (as in the example) or the foreign tax credit limitation, which is computed by applying the regular tax tables to the foreign source income only.

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Appendix XI Social security contributions and benefits

Contributions

Percentage of wages Employee Employer % %

Sickness, maternity:

Benefits in kind: Fixed quota (3) - 20.40 (1) Additional quota (3) 0.40 1.10 (2 ) Benefits in cash (3) 0.25 0.70 Benefits in kind for retired personnel (3) 0.375 1.05 Life and disability (3) 0.625 1.75 Retirement Savings Account (3) - 2 Old age (3) 1.125 3.150 Day-care centers and social benefits (3) - 1 Occupational risks (3) - ( 4 ) Housing Fund (3) - 5.00

Notes: 1. Multiplied by one minimum wage for Mexico City, regardless of the salary in question. 2. Applicable to the excess over three minimum wages for Mexico City. 3. Of the employee wage for social security purposes. 4. The percentage of the premium, which ranges from 0.50% to 15%, depends on the principal activity of the employer and its annual occupational risks.

Wage ceiling The wage ceiling for purposes of applying the above percentages will be an amount equal to the Mexico City minimum wage for the period of employment, multiplied by 25. The maximum annual social security contributions, using a minimum daily wage salary of Ps 57.46 and 2.5984% as occupational risk rate would be Ps 8,580.29 for the employer.

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Appendix XII Value-added tax – Items subject to zero rate

The following groups are zero rated (i.e., no tax is payable on them) for VAT purposes. Nevertheless, business enterprises may take credit for VAT charged to them by suppliers of goods and services used in producing the income, or claim a refund. 1. Sales or other transfers of the following: a. Animals (except for dogs, cats ad small species used as home pets;), vegetables and fruits not industrialized; for these purposes, wood is considered not industrialized; b. Patent medicines; specified basic foods, including meat, milk and eggs; c. Natural water (except when presented in containers of less than 10 liters capacity) and ice; d. Palm, istle and agave fiber; e. Tractors exclusively used to operate farm equipment, except those with crawler treads; power cultivators for small areas, plows and harrows; cultivators to spread and dewed; harvesters, sprayers or applicators of liquid or solid fertilizers, pesticides, herbicides, and fungicides; mechanical, electrical or hydraulic farm irrigation equipment; planters, equipment for silos; cutters and packers of livestock feed; grainers, equipment to manure and fertilize fields; airplanes for fumigation; hand- operated power chain saws; and, with certain limitations, commercial fishing boats (the foregoing items are granted the zero rate only when sold as complete units); f. Fertilizers, pesticides, herbicides, and fungicides if used exclusively in agriculture or livestock rising; g. Hydroponic nurseries and related equipment to produce controlled temperature and humidity or to protect plants from the elements, and irrigation equipment; h. Gold jewelry, flatware, and artistic and ornamental pieces with a minimum 80% gold content, not for retail sale; and i. Books and magazines. 2. The following independent services: a. Those furnished directly to farmers and ranchers for their agricultural and livestock activities and for well-drilling, lighting and the construction of reservoirs; electrical power for use in irrigation systems; land clearing and road building within their properties; agricultural irrigation and fumigation; harvesting, vaccination, sanitation, and insemination of livestock; and the capture and extraction of sea or freshwater species; b. Grinding and milling wheat and corn; c. Pasteurizing milk; d. Services rendered in hydroponic nurseries; e. Cotton ginning; f. Slaughter of cattle and barnyard fowl; g. Reinsurance; and h. Supply of water for domestic use.

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3. The rental of the machinery and equipment referred to in items (1)(e) and (g) above. 4. The export of tangible and intangible goods and services of the following nature*: a. Technical assistance and services and licensing or sale of intangibles; b. Assembly operations of the in-bond processing companies (i.e. maquiladora fees); c. Advertising; d. Commissions and intermediary fees; e. Insurance, reinsurance, bonding, and rebonding; f. Financial operations; g. Independent personal services provided to residents abroad without an establishment or fixed base in Mexico, provided the service benefits the non- resident entirely abroad; h. Filming or recording, so long as the requirements set forth in the VAT regulations are met; and i. Hotel services rendered to foreign tourists who visit Mexico to participate in conventions, expositions or trade-fairs. 5. International freight and related services rendered by Mexican residents. 6. International air transportation deemed taking place abroad, rendered by Mexican residents. 7. Foodstuffs is zero rated, other than the following: a. Beverages other than milk, even when classified as foods; this includes fruit and vegetable juices (with or without sugar) and concentrates, regardless of presentation, density or weight; b. Syrups and concentrates for soft drinks sold in open containers using electrical or mechanical devices, as well as concentrates, powders, syrups, essences, and extracts used in making soft drinks; c. Caviar, smoked salmon and eels; d. Flavoring agents, microcapsules and food additives. e. Gums or chewing gums. f. Processed food for dogs, cats and small species used as home pets.

*The general rate specified in Article 1 of the VAT law (16%) is applicable to the sale of the foodstuffs referred to above when prepared for consumption at the location or establishment at which they are sold, even when there are no facilities in which to consume them.

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Appendix XIII Financial Statements

Changes to Mexican Financial Reporting Standards (MFRS) and Improvements to MFRS 2014

During December 2012, 2013 and 2014, CINIF issued a series of MFRS which will be in force as of January 1, 2014, and January 1, 2016, as shown as follows:

2014 MFRS B-12 “Offsetting financial assets and financial liabilities”. Establishes standards concerning the rights of compensation to be considered in order to present a financial asset and a financial liability in their offsetting amount within the statement of the financial position, as well as which are the characteristics required contemplating compensation, based on the principle that a financial asset and a financial liability should always be recorded in their offsetting amount and provided the future cash flow of collection or settlement is net.

MFRS C-11 “Stockholders’ equity”. Establishes the valuation, presentation and disclosure standards for those items comprising stockholders’ equity in the statement of the financial position of profit entities. The main changes in relation to the above standard are: a) it requires the pricing per share to be issued by advances for future capital increases and that it is established that it can not be repaid before capitalized, in order to qualify as equity, and b) includes the standard related to financial instruments that at initial recognition are identified as equity.

MFRS C-12 “Financial instruments with features of liability and equity”. Establishes the standards for the initial recognition of final instruments with features of liability and equity in the profit entities’ financial statements. The concept of subordination is incorporated.

MFRS C-14 “Transfer and derecognition of financial assets”. Establishes the principle of transfer of risks and rewards of ownership of the financial asset, as underlying condition to derecognition. When entities deduct accounts or notes receivable with resources, they must not show the discount amount as a credit to accounts and notes receivable, but as a liability.

Improvements MFRS C-5 “Advance payments”. Establishes the accounting treatment of advanced to MFRS 2014 payments for the purchase of items for which payment is denominated in foreign currency. It also states that impairment losses in the value of advanced payments (and reversals thereof) must be submitted as part of the net profit or loss for the period in the line item that the Company deems appropriate according to its professional judgment, rather than income statement of the period under other income and expenses.

Bulletin C-15 “Impairment in the value of long-lived assets and their disposal”. Establishes that an impairment loss and its reversal in the value of intangible assets with indefinite lives (including goodwill), should be presented in the income statement of the period in the item showing the depreciation and amortization of assets of the cash-generating unit to which such intangible assets are associated. It is unacceptable to present impairment losses as part of the costs that have been capitalized in the value of any asset.

The requirement to submit certain operations in other income and expenses is removed from MFRS B-3 “Comprehensive income statement”, MFRS B-16 “Financial statements of non-profit entities”, MFRS C-6 “Property, Plant and Equipment”, Bulletin C-9 “Liabilities, provisions, contingent assets and liabilities and commitments”, MFRS D-3 “Employee benefits”, and, instead, the use of those items is left to the discretion of the Company

Doing Business in Mexico 2015 227 XIII

Improvements MFRS C-3 “Accounts receivable”. Establishes the valuation, presentation and to MFRS 2016 disclosure standards for the initial and subsequent recognition of trade receivables and other receivables in the financial statements of an economic entity. Specifies that the accounts receivable based on a contract represent a financial instrument.

MFRS C-9 “Provisions, contingencies and commitments”. Establishes the standards for the accounting recognition of provisions in the financial statements of entities, and the rules for disclosure of contingent assets, contingent liabilities and commitments in the financial statements. Reduces scope to relocate the item on the accounting treatment of financial liabilities in MFRS C-19 “Financial instruments payable”. Additionally, the terminology used throughout the regulatory approach is updated.

MFRS C-19 “Financial instruments payable”. Establishes the valuation, presentation and disclosure standards for the initial and subsequent recognition of receivables, borrowings and other financial liabilities in the financial statements of an economic entity. The concepts of amortized cost to value financial liabilities and the effective interest method, based on the effective interest rate, to make such valuation are introduced. Both discounts and issuance costs of a financial liability are deducted from the liability.

MFRS C-20 “Receivables Financing Instruments” Establishes the valuation, presentation and disclosure for the initial and subsequent recognition of receivables financing instruments in the financial statements of an economic entity operating funding. It discards the concept of intent for the acquisition and holding of these to determine ranking. It adopts the concept of a management business model.

Interpretation Interpretation of MFRS 20 “Accounting effects of the Tax Reform 2014”. The of MFRS Interpretation to MFRS 20 was issued in response to how the accounting effects of the Tax Reform 2014 should be recognized in the financial statements of entities

228 Tax and Legal Services - PwC Mexico XIII

Changes to IFRS 2014

As of January 1, 2014 the new IFRS and interpretations of IFRS, which are mentioned below must be adopted:

2014 IAS-32 “Financial Instruments: Presentation”. Some of the requirements for derecognition of financial assets and liabilities on the balance sheet are clarified.

IFRS-10 “Consolidated Financial Statements”, IAS-12 and IAS-27 for investment properties. These adjustments shall encourage many funds and similar entities to be exempt from consolidating most of its subsidiaries, instead of this, they will be measured at fair value through profit or loss. The adjustments provide an exception to entities that meet the definition of “investment firms” definition which represents particular characteristics.

MFRS-9 “Financial Instruments: Classification and Measurement.” Replaces IAS-39 “Financial Instruments: Classification and Measurement”, it has two measurement categories: at amortized cost and at fair value. Equity instruments are measured at fair value. A debt instrument is measured at amortized cost only if the entity keeps it for contractual cash flows and those cash flows represent equity and interest.

Adjustments to IFRS-9 “Financial Instruments: General hedge accounting”. The substantial change in hedge accounting allows entities to better reflect their risk management activities in the financial statements.

Adjustments to the IAS-36 “Impairment of Assets”. The adjustments treat disclosures about information of amounts recoverable from impaired assets if the amount is based on fair value less costs to sell.

Adjustments to IAS 39 “Financial Instruments: Recognition and Measurement”. The benefit of novation of derivatives in response to legislative changes across many jurisdictions that will lead to widespread novation of over-the-counter wrapper is included.

Adjustments to IAS-19 The purpose of the adjustments is to simplify the accounting for contributions which are independent of the number of years of service of employees, for example, employee contributions are calculated according to a fixed percentage of salary.

IFRIC-21 “Liens”. Establishes criteria for the recognition of a liability, requiring the entity to have a present obligation as a result of a past event. The Interpretation clarifies that the event triggering the obligation and liability giving rise to a tax payable is the activity described in the relevant legislation that triggers the payment of this tax.

New Currently a new standard on revenue recognition has been issued, although the date of entry Income into force in 2017 seems distant, it is essential to have adequate preparation. The revenue Standard recognition is a critical accounting matter and entities cannot afford to do it wrong. A single global standard will replace the specific industry standard on how the entities recognize revenue. With the change to the new model, companies that currently follow the specific industry standard may experience a considerable impact.

The new model of five steps which require more judgments and estimates than currently applicable. The five steps are: 1) identify client contracts, 2) identify the separate obligations in the contracts, 3) determine the price of transaction, 4) allocate the transaction price, and 5) recognize revenue when the obligation is satisfied.

Companies may choose how they want to adopt the standard. One way is by restating the financial statements of the prior period as if the rule had always existed, which may take time and effort. Since redoing the accounting of previous periods to achieve comparability is a big project, the board agreed to offer another option. Instead of the above, in the year of adoption companies can, for example, submit their current figures with both the new model as with the former. This method requires the presentation of financial statements for 2017 under the new standard including disclosure footnotes of all items and amounts on financial statements presented under the rule previous to 2017. This method provides a simpler alternative but also poses challenges.

Doing Business in Mexico 2015 229 XIV

Appendix XIV Acquiring a business enterprise – A checklist

Investor’s considerations History and current status of the enterprise ___ What is for sale? ___ Entire business or only controlling interest (with possible minority problems) or assets? ___ Why is business for sale? ___ Evaluation of industry in which the enterprise operates, including growth potential and stability ___ Status of target business within its industry: ___ Reputation ___ Competitive position ___ Capital structure of entity: ___ Business owned by a few or many shareholders? ___ Major shareholders ___ Analysis of different classes of equity ___ Should business be restructured? If so, what form should be used? ___ Special trade arrangements ___ Record of profitability ___ Background of owners, directors, officers

Markets and competitors ___ Markets served ___ Potential new markets ___ Effects on company’s markets of any relevant current or pending legislation ___ Expanding market ___ Proposed new products ___ Main competitors

Capital required ___ Working capital ___ Highly leveraged or cash-rich ___ Types of shares

230 Tax and Legal Services - PwC Mexico XIV

Location and premises Workforce evaluation ___ Where located? ___ Number of employees and staff at each ___ Leased or owned property main factory and office ___ Space available for expansion ___ Qualifications ___ Accessibility of services ___ Labor relations with Unions ___ Transportation available ___ Salaries ___ Professional valuation of premises ___ Fringe benefits provided and costs (appraisal) thereof ___ Safety record Management evaluation Sales and marketing ___ Key employees information ___ Analysis of current and potential ___ Present salaries and other forms of situation remuneration ___ Share of market ___ Details of service agreements and ___ Sales promotion methods pension schemes ___ Export methods and distribution ___ Industry experience ___ Nature of relationship between ___ Turnover company and its selling agents ___ Sales: Production evaluation ___ By product ___ Standards for industry ___ By major customers ___ Capacity utilization ___ By geographical market ___ Quality of plant and equipment, ___ Extent to which company is involved in including buildings fixed-price and long-term contracts ___ Nature and amount of work ___ New product potential subcontracted ___ Pricing of products ___ Intangibles ___ Governmental pricing controls ___ Details of patents, tools and dies ___ Raw materials used and principal suppliers ___ Terms of purchases ___ Any significant forward purchase commitments?

Doing Business in Mexico 2015 231 XIV

II Legal counsel’s Management/labor obligations considerations ___ Union/ Individual contracts ___ Changes in labor picture that Corporate, statutory and regulatory acquisition might bring about documents ___ Pension plan ___ Articles of incorporation ___ Fringe benefits ___ Bylaws ___ Social security ___ Share certificates ___ Work guidelines ___ Shareholders´ Meetings Minute Book ___ Mixed Commissions of Security and ___ Share Registry Book Health, Employees’ Profit Sharing and ___ Board of Directors´ Meetings Minute Training Book ___ Capital Variations Registry Book Property titles and liens ___ Description of shares or assets being ___ Real property acquired ___ List and description ___ Registration requirements (National ___ Appraisals Registry of Foreign Investments, ___ Title documents Ministry of Finance and Public Credit, ___ Title insurance policies Public Registry of Commerce) ___ Mortgages ___ Antitrust provisions ___ Tangible personal property ___ Description of liabilities assumed ___ List by category ___ Lawsuits ___ Valuation ___ Taxpayer identification number ___ Existing liens

Contractual obligations Patents, trademarks and industrial ___ Loan agreements property and copyrights owned by the ___ Government and/or long-term contracts business ___ Property leases ___ Expiry date of patents ___ Purchase or sale commitments ___ Registration and ownership ___ Licenses ___ Trademarks or Trade Names Registry ___ Franchises ___ Improvement model ___ Mortgages ___ Business secrets ___ Insurance policies ___ Copyrights ___ Allocation of contractual obligations ___ License agreements ___ Warranty obligations ___ Competitor’s patents, trademarks, ___ Pledge industrial property, and copyrights ___ Professional Services ___ Administrative Services ___ Warrants and Guarantee Agreement ___ Commission Agreements ___ Other

232 Tax and Legal Services - PwC Mexico XIV

III Accountant’s considerations Taxation ___ All returns filed Review of current situation ___ Unpaid assessments ___ Past trading results ___ Adequacy of current provision for ___ Accounting policies, compliance with income taxes standards and the law and consistency of ___ Possible additional taxes for prior years application ___ Statute of limitations ___ Financial statements: ___ Characteristics of liabilities ___ Balance sheet ___ Rulings requests in progress ___ Assets: ___ Particulars of important matters in ___ Accounts receivable dispute ___ Inventory ___ Court cases ___ Land and building(s) ___ Comments on adequacy of overall ___ Machinery and equipment provision; estimated deficiency or ___ Intangible assets surplus ___ Goodwill ___ Details of losses and allowances ___ Liabilities—short and long-term available to carry forward ___ Equity ___ Extent to which tax planning schemes ___ Income statement have been used in the past and ___ Gross profit ratio assessment of any resulting potential ___ Sales exposure ___ Other income ___ Value-added tax due or overpaid ___ Expenses ___ Asset tax carryback and carryovers ___ Gross profit ___ Flat tax (IETU) due or credited ___ Profit and cash-flow forecasts and bases of assumptions ___ Statement of changes in financial position ___ Cash flow statement ___ Pension arrangements: ___ Unfunded liabilities ___ Purchase commitments ___ Future prospects: ___ Cash flow projections ___ Financing required

Doing Business in Mexico 2015 233 XV

Appendix XV Checklist - Structuring an investment

Corporation Investor’s considerations ___ Limitations on foreign ownership, depending on activities ___ Advantages/disadvantages of incorporating ___ Limited liability ___ Pro rata expenses are nondeductible on subsidiaries ___ Hybrid entities/instruments ___ Incorporation and maintenance costs ___ Taxed as entity ___ Taxation of amounts to be distributed to shareholders ___ Statutory audit requirements ___ Financing through capital or debt ___ Minimum capital requirements ___ Leverage – Financing with dollar or peso loan ___ Advantages/disadvantages of liquidation ___ Repatriation of capital and profits

Legal counsel’s considerations ___ Type of entity ___ At least two shareholders required ___ Applicable authorizations ___ Articles of incorporation ___ Bylaws ___ Corporate name options ___ Registration requirements (National Registry of Foreign Investments, Ministry of Finance and Public Credit, Public Registry of Commerce) ___ Taxpayer identification number ___ Social security affiliation ___ Share certificates ___ Book of Shareholders ___ Book of Shareholders’ Meetings Minutes ___ Book of Board of Directors’ Meetings Minutes ___ Book of Capital Variations’ Registry ___Annual Shareholders’ Meeting ___ Other formalities

Accountant’s considerations ___ Financial statements filing requirements ___ Tax advantages/disadvantages of incorporating ___ Tax regime ___ Tax planning opportunities

234 Tax and Legal Services - PwC Mexico XV

II Branch Investor’s considerations ___ Advantages/disadvantages of operating as a branch ___ Foreign companies can set up branch operation ___ Limitations of foreign participation depending on their activities ___ Losses can be offset against income of non-resident parent ___ Reasonable pro rata expenses deductible ___ Parent company is liable ___ Remittances to the home office are non-deductible ___ Capital provided by parent ___ Repatriation of capital and profits ___ No exchange controls ___ Advantages/ disadvantages of closing a branch office

Legal counsel’s considerations ___ Requirements to establish branch ___ Authorization from the Ministry of Economy ___ Registration requirements ((National Registry of Foreign Investments, Ministry of Finance and Public Credit, Public Registry of Commerce) ___ Documentation

Accountant’s considerations ___ Separate financial statements ___ Taxation of a branch ___ Branch profits tax considerations ___ Payment of remittances ___ Tax planning opportunities

Doing Business in Mexico 2015 235 XV

III—Partnership Investor’s consideration ___ Limitations of foreign investment participation, depending on their activities ___ Requirements for partners ___ Advantages/disadvantages of operating as a partnership

Legal counsel’s considerations ___ Incorporation requirements ___ Authorization from the Ministry of Economy ___ Registration requirements (Public Registry of Commerce, National Registry of Foreign Investments) ___ Documentation

Accountant’s considerations ___ Taxed as conduit or entity ___ Tax planning opportunities

IV—Joint Venture (Asociación en Participación) Investor’s considerations ___ It’s an agreement, not a legal entity ___ Administration of a joint venture ___ Obligations in a joint venture (between parties, vis a vis third parties) ___ Term of a joint venture ___ Advantages/disadvantages of participating in a joint venture ___ Active partner and silent partner needed

Legal counsel’s considerations ___ Requirements ___ Drafting the agreement

Accountant’s considerations ___ Separate financial statements ___ Taxed as a corporation for tax purposes

236 Tax and Legal Services - PwC Mexico XVI

Appendix XVI Major events/changes

The Mexican economy is expected to grow around 3% in 2014. Inflation has been moderate in the last decade and at the same time international reserves have reached their highest level, standing at 180 billion dollars. The markets reflect this optimism, with the Mexican stock index tending to high. GDP has doubled in a decade except for the years of world economic crisis, and Mexicans are again making long-term capital investments in Mexico. Credit for this growth goes to the Mexican people and to sound government policies. Mexico has been on a reforming path for a number of years, privatizing, deregulating and pruning the role of government. President Enrique Peña Nieto’s plan, which focuses on strengthening the rule of law, facilitating cross-border trade, and enhancing intellectual property rights protection, is a good example of the spirit of economic optimism that we increasingly see across Mexico. Part of this reform process has been the increased internationalization of Mexico’s economy, which is seen in our foreign trade, with more than US $450 billion in goods and services crossing our borders (in and out). During 2014, the cross-border transactions the development of strategic industries and large investments continue in the automotive and manufacturing industries. At the date of this publication, significant reforms in energy and telecommunications are being discussed with the very high expectation that additional investments will be made in the post reform environment. Total foreign investment for 2013 amounted to US $20 billion. For Mexico, trade with the U.S. is greater than its trade with the rest of the world combined. For the U.S., trade with Mexico is larger than its trade with all of Latin America, including Brazil, Argentina, all of Central America, and all of the Caribbean, with enough left over to cover all its trade with India as well. Mexico keeps the reform process going through the U.S.-Mexico-Canada Security and Prosperity Partnership, which tackles issues such as: protection against faulty consumer goods; managing infectious diseases; reducing wait times at borders; and combating fakes and counterfeits. According to the World Bank, Mexico has been a top economic reformer, leapfrogging more than 20 countries in the 2007 annual survey of economic reform, and was recognized by the IMF (International Monetary Fund) in 2009 as the 13th largest economy in the world. In areas of starting a business, protecting investors and paying taxes, Mexico has made exceptional progress. According to the latest report (January March 2014) Mexico has increased its tax revenue by 4.4% in real terms when compared to the same period in 2013, Oil income for the Federal government has remained with its usual movement, but the tax income non-derived from oil has raised an 11.4%. It is expected that the recently announced “National Infrastructure Program” will benefit from this revenue increase and will create a multiplier effect in growth and development.

Doing Business in Mexico 2015 237 Business information services

Government agencies and embassies Canadian Embassy Schiller 529 Australian Embassy Col. Polanco, Ruben Darío 55 11580, Mexico, D. F. Col. Bosque de , Telephone: +52 55 5724 7900 11580, Mexico, D. F. Fax: +52 55 5724 7982 Telephone: +52 55 1101 2200 Email: [email protected] Fax: +52 55 1101 2201 www.canadainternational.gc.ca/ Email: [email protected] mexico-mexique/ www.mexico.embassy.gov.au Chilean Embassy Austrian Embassy Andres Bello No.10 piso 18 Sierra Tarahumara Pte. 420 Col. Polanco, , 11560, Mexico, D. F. 11000 Mexico, D. F. Telephone: +52 55 5280 9681, 5280 9682, Telephone: +52 55 5251 0806 5280 9699, 5280 9698 Fax: +52 55 5245 0198 Fax: +52 55 5280 9703 Email: [email protected] Email: [email protected] www.bmeia.gv.at/es/embajada/mexico www.embajadadechile.com.mx Belgium Embassy Chinese Embassy Alfredo Musset 41 Av. San Jeronimo 217 B Col. Polanco, Col. La Otra Banda, 11550, Mexico, D. F. 01090, Mexico, D. F. Telephone: +52 55 5280 0758 Phone: +52 55 5616 0609, 5616 4324, Fax: +52 55 5280 0208 5616 4309, 5616 4239 Email: [email protected] Fax: +52 55 5616 0460, www.diplomatie.be/mexico Email: [email protected] Brazil Embassy www.embajadachina.org.mx Lope de Armendariz 130 Colombian Embassy Col. Lomas Virreyes, 412 piso 19 11000 Mexico, D. F. Col. Juárez, Telephone: +52 55 52011 4531 06600, Mexico, D. F. Fax: 5520 6480 Telephone: +52 55 5525 0277, Email: [email protected] Fax: +52 55 5208 2876 http://mexico.itamaraty.gov.br Email: [email protected] British Embassy www.colombiaenmexico.org Rio Lerma No. 71 Costa Rican Embassy Col. Cuauhtémoc, Rio Po 113 06500, Mexico, D. F. Col. Cuauhtemoc, Telephone: +52 55 1670 3200, 1670 3204, 06500, Mexico, D. F. 1670 3202 Telephone: +52 5525 7764, 5525 7765, Fax: +52 55 1670 3217 5525 7766 Email: [email protected] Fax: +52 55 5511 9240 www.gov.uk/government/world/organisations/ Email: [email protected] british-embassy-mexico-city.es-419 www.embajada.decostaricaenmexico.org

238 Tax and Legal Services - PwC Mexico Delegation of the European Union Ireland Embassy Embassy Cda. Blvd. Manuel Avila Camacho 76 piso 3 Paseo de la Reforma 1675 Col. Lomas de Chapultepec, Lomas de Chapultepec, 11000, Mexico, D. F. 11000, Mexico, D.F. Telephone: +52 55 5520 5803 Telephone: +52 55 5540 4547 Fax: +52 55 5520 5892 Fax: +52 55 5540 6564 Email: [email protected] Email: [email protected] Website: www.irishembassy.com.mx http://eeas.europa.eu/delegations/mexico Israeli Embassy Denmark Embassy Sierra Madre 215 Tres Picos No. 43 Col. Lomas de Chapultepec, Col. Chapultepec Morales, 11000, Mexico, D. F. 11580, Mexico, D. F. Telephone: +52 55 5201 1500 Telephone: +52 55 5255 3405 Fax: +52 55 5201 1555 Fax: +52 55 5545 5797 Email: [email protected] Email: [email protected] http://mexico-city.mfa.gov.il/ www.ambmexicocity.um.dk Italian Embassy Finnish Embassy Paseo de las Palmas 1994 Monte Pelvoux No. 111, 4th floor, Col. Lomas de Chapultepec, Col. Lomas de Chapultepec, 11000, Mexico, D. F. 11000, Mexico, D. F. Telephone: +52 55 5596 3655 Telephone: +52 55 5540 6036 Fax: +52 55 5596 2472 Fax: +52 55 5540 0114 Email: [email protected] Email: [email protected] [email protected] www.finlandia.org.mx www.ambcittadelmessico.esteri.it

French Embassy Japan Embassy Campos Eliseos 339 Paseo de la Reforma 395 Col. Chapultepec Polanco, Col. Cuauhtemoc, 11560, Mexico, D. F. 06500, Mexico, D. F. Telephone: +52 55 9171 9700 Telephone: +52 55 5211 0028 Emergency: +52 55 9171 9707 Fax: +52 55 5207 7743 Fax: +52 55 9171 9703 Email: [email protected] www.ambafrance-mx.org www.mx.emb-japan.go.jp German Embassy Netherlands Embassy Horacio 1506 Vasco de Quiroga No. 3000 piso 7, edificio Col. Los Morales Polanco, Calakmul 11530, Mexico, D. F. Santa Fe, Telephone: +52 55 5283 2200 01210, Mexico, D. F. Fax: +52 55 5281 2588 Telephone: +52 55 1105 6550 Email: [email protected]. Fax: +52 55 5258 8138 www.mexiko.diplo.de Email: [email protected] India Embassy http://mexico.nlembajada.org/ Musset 325 www.paisesbajos.com.mx Col. Polanco, New Zealand Embassy 11550, Mexico, D. F. Jaime Balmes 8 piso 4, Despacho 404 A Telephone: +52 55 5531 0850, 5531 1050, Col. Los Morales Polanco, 5531 1002 11510, Mexico, D. F. Fax: +52 55 5254 2349 Telephone: +52 55 5283 9460 Email: [email protected] Fax: +52 55 5283 9480 [email protected] Email: [email protected] www.indembassy.org www.nzembassy.com/mexico

Doing Business in Mexico 2015 239 Norwegian Embassy Spanish Embassy Blvd. Virreyes 1460 Galileo 114 Col. Lomas Virreyes, Col. Polanco, 11000, Mexico, D. F. 11550, Mexico, D. F. Telephone: +52 55 5540 3486, 5540 3487 Telephone: +52 55 5282 2974, 5282 2271, 5282 Fax: +52 55 5202 3019 2459, 5282 2763, 5282 2982 Email: [email protected] Fax: +52 55 5282 1302, 5282 1520 www.noruega.org.mx Email: [email protected] www.exteriores.gob.es/embajadas/mexico/es/ Republic of Korea Embassy Paginas/inicio.aspx Lope Diaz de Armendariz 110 Col. Lomas Virreyes, Swedish Embassy 11000, Mexico, D. F. Paseo de las Palmas 1375 Telephone: +52 55 5202 9866, Col. Lomas de Chapultepec, Fax: +52 55 5540 7446 11000, Mexico, D. F. Email: [email protected] Telephone: +52 55 9178 5010 http://mex.mofat.go.kr Fax: +52 55 5540 3253 Email: [email protected] Russian Federation Embassy www.swedenabroad.com/es-ES/Embassies/ Jose Vasconcelos 204 Mexico-City/ Col. Hipodromo , 06140, Mexico, D. F. Swiss Embassy Telephone: +52 5273 1305, 5516 0870 Paseo de las Palmas 405 piso 11, Torre Óptima Fax: +52 55 5273 1545 Col. Lomas de Chapultepec, Email: [email protected] 11000, Mexico, D. F. www.embrumex.com.mx Telephone: +52 55 9178 4370 Fax: +52 55 5520 8685 Saudi Arabia Embassy Email: [email protected] Paseo de la Palmas 2075 www.eda.admin.ch/mexico Lomas de Chapultepec, 11000, Mexico, D. F. United Arab Emirates Telephone: +52 55 5020 3161, 5020 3162, Paseo de la Reforma 505 5251 0789 Col. Lomas de Chapultepec, Fax: +52 55 5020 3160 11000, Mexico, D. F. Email: [email protected] Telephone: +52 55 5207 0025 Fax: +52 55 5282 4387 Singapore Consulate http://esp.uae-embassy.mx/embassy/ Ruben Dario 69 ambassador-saeed-rashed-al-zaabi/ Col. Bosque de Chapultepec, 11580, Mexico, D. F. United States, US Embassy Telephone: +52 55 9150 7802, 9150 7803 Paseo de la Reforma 305 Fax: +52 55 9150 7805 Col. Cuauhtemoc, Email: [email protected] 06500, Mexico, D F. www.mfa.gov.sg/mexico-city Telephone: +52 55 5080 2000 Fax: +52 55 5080 2313 South African Embassy Email: [email protected] Andres Bello 10 piso 9, edificio Forum www.usembassy-mexico.gov Col. Polanco, 11560, Mexico, D. F. Telephone: +52 55 1100 4970 Fax: +52 55 5282 9259 Email: [email protected] Note: The larger comercial banks, such as Banamex, Bancomer, and , have foreign www.dfa.gov.za/foreign/sa_abroad/sam. investment departments staffed to assist htm#mex prospective investors in establishing business contacts and other matters.

240 Tax and Legal Services - PwC Mexico Private business entities Israel Chamber of Commerce in Mexico Dickens 20 A Col. Polanco, American Chamber of Commerce 11560, Mexico, D. F. of Mexico Telephone: +52 55 5202 4776 Blas Pascal 205 piso 3 www.cmi.org.mx/ Los Morales, 11510, Mexico D. F. Italian Chamber of Commerce in Mexico Telephone: +52 55 5141 3800 Presidente Mazarik 490 - 801 Fax: +52 55 5141 3835, 5141 3836 Col. Polanco, Email: [email protected] 11550, Mexico, D. F. www.amcham.com.mx Telephone: +52 55 5282 2500 Email: [email protected] British Chamber of Commerce www.camaraitaliana.com.mx Río de la Plata 30 Col. Cuauhtemoc, Japanese Chamber of Commerce 06500, Mexico, D. F. in Mexico Telephone: +52 55 5256 0901 Fujiyama 144 Fax: +52 55 5211 5451 Col. Las Aguilas, Email: [email protected] 01710, Mexico, D. F. www.britchamexico.com Telephone: +52 55 5593 2020, 5593 2727, 5593 2828 Chamber of Commerce Mexico-Brasil Fax: +52 55 5593 2121 No. 143, Piso 3 Email: [email protected] Col. Juarez www.japon.org.mx 06600, Mexic, D.F. Telephone: +52 55 5540 4326 Mexican Council on Foreign Relation Fax: +52 55 5540 4335 (COMEXI) Email: [email protected] Sierra Mojada 620, oficina 502, Torre Magnum www.camebra.mx Col. Lomas de Chapultepec, 11000, Mexico, D. F. China Chamber of Commerce Telephone: +52 55 5202 3776, 5202 3029 Lucerna 62 Despacho 601 Email: [email protected] Col. Juarez, www.consejomexicano.org 06600, Mexico, D. F. Telephone: +52 55 5511 2011, 5207 7048 Mexican- German Chamber of Commerce Email: [email protected] and Industry www.chinachambermexico.org Av. Santa Fe 170 Col. Lomas de Santa Fe, Colombian Chamber of Commerce 01210, Mexico, D. F. in Mexico Telephone: +52 55 1500 5900 Av. Paseo de las Palmas 755 -1102 Fax: +52 55 1500 5910 Col. Lomas de Chapultepec, Email: [email protected] 11000, Mexico, D. F. http://mexiko.ahk.de Tel/Fax: +52 55 91781628 - 29 Email: [email protected] Spain Chamber of Commerce www.ccmexcol.com Homero 1430 Col. Polanco, Franco-Mexican Chamber of Commerce 11510 Mexico, D. F. Protasio Tagle No. 104 Telephone: +52 55 5395 5281 Col. San Miguel Chapultepec, Email: [email protected] 11850, Mexico, D. F. www.camescom.com.mx Telephone: +52 55 5272 0960 Email: [email protected] www.franciamexico.com/es/

Doing Business in Mexico 2015 241 PwC Mexico Tax and Legal Team

Territory Tax and Legal Services Leader Mauricio Hurtado de Mendoza [email protected] +52 55 5263 6045

Oficinas de la Ciudad de Mexico Oficinas Foráneas

Mariano Escobedo Cancún Jose Alfredo Hernández Linares Mario Arteaga Quintana [email protected] [email protected] +52 55 5263 6060 +52 999 948 2957

Leibnitz Chihuahua y Ciudad Juarez Ruben Guerra Contreras Enrique Lopez Villa [email protected] [email protected] +52 55 5263 6051 +52 664 615 5004

Masaryk Guadalajara Mauricio Hurtado de Mendoza V. Raul Sicilia Barba [email protected] [email protected] +52 55 5263 6045 +52 33 3648 1014

Satelite Hermosillo Angel Cruz Antonio Enrique Lopez Villa [email protected] [email protected] +52 55 1940 2556 +52 664 615 5004

Leon Gustavo Preciado Puga [email protected] +52 444 454 3506

Merida y Villahermosa Mario Arteaga Quintana [email protected] +52 999 948 2957

242 Tax and Legal Services - PwC Mexico Monterrey Tijuana Fausto Cantu Solis Enrique Lopez Villa [email protected] [email protected] +52 81 8152 2052 +52 662 289 5004

Puebla Torreon Jaime Diaz Martín Del Campo Hector Aguilar [email protected] [email protected] +52 222 273 4420 +52 656 892 2213

Queretaro Veracruz Roberto Pacheco Gonzalez Jaime Díaz Martín Del Campo [email protected] [email protected] +52 442 290 6910 +52 222 273 4420

San Luis Potosi Gustavo Preciado Puga [email protected] +52 444 454 3506

The purpose of this document is to be only a general reference on certain areas of interest. The application and effect of the law may vary depending on the specific data included herein. Omissions or inaccuracies are possible due to the changing nature of the laws, rules and regulations. This document is distributed based on the understanding that the authors and editors are not bound to offer legal, accounting and tax advice, nor other professional services. Therefore, this document cannot replace direct accounting, tax or legal professional advice, or any other type of advice. Before making any decision or taking any action, we recommend calling upon a professional of PwC Mexico. Even though we made our best effort to base the contents of this document on reliable sources, PwC Mexico is not responsible for any mistake or omission resulting from the use of this information. The data included in this document is provided “as found” in the original source, without guaranteeing its integrity, precision, accuracy or assuming the responsibility for the results obtained through its application; and without any other kind of guarantee, expressed or implicit, including but not limited to performance, commercialization and convenience guarantees to reach an specific goal. PwC Mexico, its affiliated companies/firms, partners, agents or employees cannot be held accountable for any decision or measure implemented by you or any other person based on this information, as well as for any resulting damage or harm, specific or similar, including a notification about the possibility of such damage. MPC: 121404_BR_DB Mexico_TLS Our network

Offices in Mexico City

Mariano Escobedo Satélite Mariano Escobedo 573 Corporativo City Shops Colonia Rincón del Bosque Boulevard Manuel Ávila Camacho 3130, piso 8 11580 Mexico D.F. Colonia Valle Dorado Telephone: +52 (55) 5263 6000 54020 Tlalnepantla, Estado de Mexico Fax: +52 (55) 5263 6010 Telephone: +52 (55) 1940 2500 Fax: +52 (55) 1940 2513

Leibnitz Masaryk Leibnitz 117, Despacho 401, floor 4 Presidente Masaryk 555 Colonia Anzures Colonia Bosques de Chapultepec 11590 Mexico D.F. 11580 Mexico D.F. Telephone: +52 (55) 5263 6000 Telephone: +52 (55) 5263 6000 Fax: +52 (55) 5263 6010 Fax: +52 (55) 5263 6010

Northeastern Offices Northwestern Offices

Monterrey Chihuahua Avenida Rufino Tamayo 100 Edificio Punto Alto E-2 Colonia Valle Oriente Av. Valle Escondido 5500, 66269 San Pedro Garza García, NL int. 204 y 205 Telephone: +52 (81) 8152 2000 Fraccionamiento El Saucito Fax: +52 (81) 8152 2075 31125 Chihuahua, Chihuahua Telephone: +52 (614) 425 3960 Tampico Fax: +52 (614) 425 3961 Avenida Hidalgo 5502 B, piso 4 Esquina con Privada Hidalgo Ciudad Juárez Colonia Laguna de la Herradura Blvd. Tomás Fernández 8490 89364 Tampico, Esquina con Camino Real SENECÚ Telephone: +52 (833) 306 7000 Fraccionamiento Anglia Fax: +52 (833) 306 7010 32459 Ciudad Juárez, Chihuahua Telephone: +52 (656) 892 2200 Torreón Fax: +52 (656) 892 2210 Paseo de la Rosita 780-1 Colonia Campestre La Rosita Hermosillo 27250 Torreón, Blvd. Solidaridad 335 Telephone: +52 (871) 721 9611 Edificio “A”, piso 5 Fax: +52 (871) 721 9681 Colonia Paseo del Sol 83246 Hermosillo, Sonora Telephone: +52 (662) 289 0202 Fax: +52 (662) 289 0200

Tijuana Tapachula 11550, interior B Colonia Chapultepec 22020 Tijuana, Baja California Telephone: +52 (664) 615 5000 Fax: +52 (664) 615 5010 Western Offices Southeastern Offices Guadalajara Cancún Av. Prolongación Américas 1905, piso 8 Avenida Bonampak 73 Colonia Colomos Super Mz-3, Mz-10 Edificio Global Providencia Sector Hidalgo Cancún Torre “B”, depto. 501 44660 Guadalajara, Jalisco Colonia Benito Juárez Telephone: +52 (33) 3648 1000 77500 Cancún, Quintana Roo Fax: +52 (33) 3648 1002 Telephone: +52 (998) 287 5000 Fax: +52 (998) 287 5010 León Paseo del Moral 502, piso 5 Mérida Fraccionamiento Jardines del Moral Calle 33-501-A, piso 7, deptos. 12-13. 37160 León, Guanajuato Por Prol. Paseo de Montejo y 46A, Telephone: +52 (477) 717 2911 Fraccionamiento Gonzalo Guerrero Fax: +52 (477) 779 4724 97118 Mérida, Yucatán Telephone: +52 (999) 948 2958 Querétaro Fax: +52 (999) 948 3150 Edificio TEC 100 Avenida Tecnológico 100, piso 6 Colonia San Ángel Avenida 31 Poniente 4128, piso 8 76030 Querétaro, Querétaro Colonia Ampliación Reforma Sur Telephone: +52 (442) 290 6900 72160 Puebla, Puebla Fax: +52 (442) 290 6904 Telephone: +52 (222) 273 4400 Fax: +52 (222) 273 4405 San Luis Potosí Edificio MW Veracruz Alberto Cossío 105, piso 12 Blvd. Manuel Ávila Camacho 5256 Fraccionamiento Tangamanga Esquina Avenida Adolfo Ruiz Cortines 78269 San Luis Potosí, S.L.P. Zona Hotelera Telephone: +52 (444) 817 9217 94298 Boca del Río, Veracruz Fax: +52 (444) 817 8421 Telephone: +52 (229) 775 6000 Fax: +52 (229) 775 6010

Villahermosa Torre Atenas, oficina 403, piso 4 Avenida Paseo Tabasco 1406 Colonia Oropeza 86030 Villahermosa, Tabasco Telephone: +52 (993) 310 6730 Fax: +52 (993) 310 6735 © 2015 PricewaterhouseCoopers S.C. All rights reserved. PwC refers to the Mexico member firm, and may sometimes referto the PwC network. Each member firm is a separate legal entity. Please see www.pwc.com/ structure for further details.This content is for general information purposes only, and should not be used as a substitute for consultation withprofessional advisors.

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